Question: Should an investor expect a mutual fund

> You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.

> What is the price of the following zero coupon bonds if interest rates are (a) 4 percent, (b) 7 percent, and (c) 10 percent? • Bond A: zero coupon; maturity 5 years • Bond B: zero coupon; maturity 10 years • Bond C: zero coupon; maturity 20 years What

> Molly Matters Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $80 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $794. a) You are in the 30 percent

> An investor in the 35 percent tax bracket may purchase a corporate bond that is rated double B and is traded on the New York Stock Exchange (the bond division). This bond yields 9.0 percent. The investor may also buy a double-B-rated municipal bond with

> An investor is in the 28 percent income tax bracket and can earn 3.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond s

> What differentiates convertible bonds from other bonds?

> Kris Trejo, who recently retired, has come to you for financial help. At the initial consultation, you realized that he is an investor with a very low risk tolerance who wants to increase current income. Trejo has $300,000 invested in certificates of dep

> Fiona Corcoran is responsible for meeting distributions for EEM Health and Life Insurance Company. An actuary, Robert Bjornsund, has forecasted that a specific policy will require $210,000 after ten years. Current interest rates are 8 percent, and RPM Re

> Stephanie Waldron is an aggressive individual whose career as a self-employed management consultant has blossomed. Waldron is both willing and able to bear substantial risk in order to earn a higher return. She is also very independent, preferring to mak

> What advantages do discounted bonds offer to investors? Why may a bond be called if it is selling at a premium?

> What are the holding period and the annualized compounded returns if you buy a zero coupon bond for $519 and it is redeemed after five years for $1,000? Compare the answer to the answer for Problem 5. Data from Problem 5: A $1,000 zero coupon bond sell

> The Sourland Mountain in New Jersey investment club has recently asked you to give a presentation on investing in corporate bonds. Club members have previously invested solely in corporate stocks, but several members have expressed an interest in diversi

> Which Dow Jones Industrial Average stocks would be considered “dogs”? Determine the Dow dogs as of January 1; invest $1,000 in each dog. At the end of a time period such as the semester or year, compare the dogs’ performance with the performance of the D

> What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending was directed toward foreign goods?

> Your clients, Eva and Walther Sachs, operate a successful catering business specializing in Germanic and eastern European foods. It is a family business with part-time workers during peak periods. Most of the part-time employees have regular full-time jo

> You are given the following information concerning several mutual funds: During the time period, the Standard & Poor’s stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm 2 rf 5 10.5%). a) Rank the performance of

> Consider the following four investments. a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years? b) You invest $3,000 annually in a m

> Why does technical analysis receive little support from academically oriented students of investments

> If an investor buys shares in a no-load mutual fund for $31.40 and the share appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on the investment?

> How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?

> What is the Federal Reserve? What are its economic goals?

> What factors, besides the expected rate of inflation, may affect the rate of interest a borrower pays?

> As a portfolio manager, you are required to provide clients with a measure of your performance, a comparison with the market, and a measure of risk. Initially, your portfolio was worth $10 a share. During the last five years, the ending values of the por

> Christina Molitoris is preparing for a meeting of the board of directors of Chesapeake Bay Corporation, a developer of moderate-priced homes and vacation homes in the Chesapeake Bay area. The combination of the location near major metropolitan areas with

> This chapter illustrated the calculation of financial ratios using the financial statements of Chloe’s CoatS, a manufacturer and marketer of clothing. Tinker’s TrouserS also manufactures clothing. Given selected financial data for Tinker&rs

> A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and pay interest of 8 percent. The firm could issue preferred stock with a dividend rate of 8 percent

> Two firms have sales of $1 million each. Other financial information is as follows: What are the operating profit margins and the net profit margins for these two firms? What is their return on equity? Why are they different? If total assets are the sam

> You have taken the following information from a firm’s financial statements. As an investor in the firm’s debt instruments, you are concerned with its liquidity position and its use of financial leverage. What conclusi

> What is the difference between “support” and “resistance” in technical analysis?

> A company whose stock is selling for $60 has the following balance sheet: / a) Construct a new balance sheet showing the effects of a 3-for-1 stock split. What is the new price of the stock? b) Construct a new balance sheet showing the effects of a 10 p

> A firm has the following items on its balance sheet: Describe how each of these accounts would appear after the following: a) A cash dividend of $1 per share b) 10 percent stock dividend (fair market value of stock is $13 per share) c) A 3-for-1 stock s

> An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan. a) If neither the dividend nor the price changes, how many shares will the investor h

> Determine the times-dividend-earned ratio given the following information: 30% corporate income tax rate $10,000 earnings before interest and taxes $2,000 interest owed $2,000 preferred stock dividends

> If a firm has sales of $42,791,000 a year, and the average collection period for the industry is 40 days, what should be this firm’s accounts receivable if the firm is comparable to the industry?

> A firm with sales of $500,000 has average inventory of $200,000. The industry average for inventory turnover is four times a year. What would be the reduction in inventory if this firm were to achieve a turnover comparable to the industry average?

> What is the debt/equity ratio and the debt ratio for a firm with total debt of $700,000 and equity of $300,000?

> You purchased $1,000 of IBM stock at the end of each quarter from 2000 through 2006. Excluding commissions, how many shares have you accumulated? As of January 2010, IBM was selling for $130. What was the position worth in January 2010? (For questions 7

> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions? What were the percentage changes for these measures of the stock market in subsequent years? Dow Jones Industrial Average (ADJI) 11,4

> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions?

> What is the problem with time lags in technical analysis and why may the analysis lead to self-fulfilling predictions?

> What is the advantage of using a relative rather than an absolute scale to construct graphs of security prices?

> Historically, what rates of return have investors earned on investments in common stocks?

> Why may averaging percentage changes produce an inaccurate measure of the true rate of return?

> How does the computation of the Dow Jones Industrial Average differ from Standard & Poor’s 500 stock index and the Value Line index?

> What is a value-weighted average? Why does such an average place more emphasis on such firms as Microsoft and ExxonMobil than on other companies?

> How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?

> How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?

> Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?

> What are the differences among loading fees, exit fees, and 12b-1 fees?

> What is a moving average? What is the significance when a stock’s price crosses a moving average of the stock’s price?

> What assets do money market mutual funds acquire? Could an individual investor with $12,345 to invest in a safe, short-term security acquire these assets?

> What differentiates a traditional savings account at a commercial bank from a money market mutual fund? Are investments in money market funds as safe as savings accounts and certificates of deposit with a commercial bank?

> What advantage do “families” of funds offer?

> What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?

> What is a loading charge? Do all investment companies charge this fee?

> Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?

> Part 3 in the previous chapter requested that you obtain ratios such as the return on equity and the profit margin. A high profit margin and a high return on equity are desirable, but those data are derived from the firm’s balance sheet

> How do interest rates and risk affect a stock’s price in the Capital Asset Pricing Model?

> What variables affect the value of a stock according to the dividend-growth model? What role do earnings play in this model?

> What is the difference between the value of a stock and its price? When should they be equal?

> What changes produce a sell signal in the Dow Theory and Barron’s confidence index?

> What is the difference between the expected return and the required return? When should the two returns be equal?

> The efficient market hypothesis suggests that it is difficult to outperform the market on a consistent basis. Are there possible exceptions to the hypothesis that concern the valuation of common stock?

> Several closed-end investment companies and iShares invest in the same country, such as the Japan Equity Fund (JEQ) and the iShares Japan Index Series (EWJ). Compare their monthly percentage changes (i.e., monthly returns) for three years and compute the

> Why may investing in an ETF such as the various iShares be preferable to acquiring shares in a mutual fund that makes foreign investments?

> Why are hedge funds and private equity funds of little interest to most investors?

> How may mutual funds, closed-end investment companies, and ETFs be used to take positions in foreign securities?

> Why does arbitrage virtually assure that an ETF will sell for its net asset value?

> How do exchange-traded funds (ETFs) differ from mutual funds? Why may they be considered alternatives to index mutual funds?

> Using the information on the taxation of REIT distributions, what was the tax status of recent annual distributions made by Plum Creek Timber (PCU), UDR Inc. (UDR), and Washington Real Estate Investment Trust (WRE)?

> What differentiates a real estate investment trust (REIT) from a firm involved in building, developing, and owning properties? What differentiates a mortgage trust from an equity trust? What advantages do REITs offer investors over direct investments in

> What is the purpose of technical analysis, and why are those who use technical analysis referred to as chartists?

> Why can a closed-end investment company sell for a discount from net asset value but a mutual fund cannot sell for a discount?

> What are the differences between a closed-end investment company and a mutual fund? What are the sources of return from an investment in a closed-end investment company?

> Your broker suggests that the stock of QED is a good purchase at $25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm’s beta coefficient is 1.34, and th

> The annual risk-free rate of return is 2 percent and the investor believes that the market will rise annually at 7 percent. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should be the value of the stock if its earnings and

> An investor buys shares in a mutual fund for $20 per share. At the end of the year the fund distributes a dividend of $0.58, and after the distribution the net asset value of a share is $23.41. What would be the investor’s percentage return on the invest

> If a mutual fund’s net asset value is $23.40 and the fund sells its shares for $25, what is the load fee as a percentage of the net asset value?

> What is the net asset value of an investment company with $10,000,000 in assets, $790,000 in current liabilities, and 1,200,000 shares outstanding?

> You are given the following data: a) What is the value of the stock? b) If the growth rate increases to 6 percent and the dividend remains $1, what is the value of the stock? c) If the required return declines to 9 percent and the dividend remains $1, wh

> Management has recently announced that expected dividends for the next three years will be as follows The firm’s assets will then be liquidated and the proceeds invested in the preferred stock of other firms so that the company will be

> Management has recently announced that expected dividends for the next three years will be as follows For the subsequent years, management expects the dividend to grow at 5 percent annually. If the risk-free rate is 4.3 percent, the return on the market

> Why do the supporters of behavioral finance suggest that emotions lead to inferior investment decisions?

> The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows: For the subsequent years you expect the dividend to grow but at the modest rate of 4 percent annually. What is the maximum p

> You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, respectively. a) Since A offers higher po

> You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is k = 8% + (15% 2 8%) b. a) What is the required return for each stock? b) If A is selling for $

> A firm’s stock earns $2 per share, and the firm distributes 40 percent of its earnings as cash dividends. Its dividends grow annually at 4 percent. a) What is the stock’s price if the required return is 8 percent? b) The firm borrows funds and, as a resu

> An investor requires a return of 12 percent on risky securities. A stock sells for $25, it pays a dividend of $1, and the dividends compound annually at 7 percent. Will this investor find the stock attractive? What is the maximum amount that this investo

> Amanda Monaco has just inherited her father’s company. Prior to his death, Mr. Monaco was the sole stockholder, and he left the entire company to his only daughter. Although Amanda has worked for the firm for many years as a commercial

> Ken Saffaf’s 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems (DMS), a firm specializing in computer services for doctors. DMS offers employees a 401(k) plan to which employees may contribute 5 percent of

> The following correlation matrix gives the correlation coefficients for several sectors within the S&P 500. What can you conclude concerning investing in the sectors to diversify a portfolio? Health Consumer Staples Financials Care Utilitles Con

> You make an investment and the annual returns are as follows: The average annual return is 3 percent. What is the true annualized return? Year Return 1 25% 2 3 3 -18 4 -10 5 15

> In October 2009, Ares Capital Corporation (ARCC) announced that it was acquiring Allied Capital (ALD). The terms of the acquisition specified that one share of ALD would become 0.325 share of ARCC. Prior to the announcement, the closing daily prices of t

> What are several human traits that tend to affect investment decisions?

> Currently a stock index stands at 100 and the leveraged ETF is selling for $100. The ETF should generate a return that is twice the daily return on the index. Over the next 21 days the value of the index and its daily percentage change are as follows: W

> The portfolio manager of a hedge fund believes that stock A is undervalued and stock B is overvalued. Currently their prices are $30 and $30, respectively. The portfolio manager of the fund buys 100 shares of A and sells 100 shares of B short. a) Why doe

> REITs pay dividends in order to retain their favorable tax status. As the next chapter on stock explains, corporate dividends are made from earnings. REIT dividends often are not made from earnings but the distributions are made from funds from operation

> You purchase a REIT for $50. It distributes $3 consisting of $1 in income, $0.50 in long-term capital gains, $0.30 in short-term capital gains, and $1.20 in return of capital. After a year, you sell the stock for $56. If you are in the 30 percent income

> a) A closed-end investment company is currently selling for $10 and its net asset value is $10.63. You decide to purchase 100 shares. During the year, the company distributes $0.75 in dividends. At end of the year, you sell the shares for $12.03. At the

> You believe that QED stock may be a good investment and decide to buy 100 shares at $40. You subsequently buy an additional $4,000 worth of the stock every time the stock’s price declines by an additional $5. If the stock’s price declines to $28 and rebo