What cash flows are relevant to the value of stock? Why the Fed was initially established? Suppose a firm’s stock has a beta of 1.2. What will probably happen to the value of the stock if the market...

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What cash flows are relevant to the value of stock?
Why the Fed was initially established?
Suppose a firm’s stock has a beta of 1.2. What will probably happen to the value of the stock if the market decreases by 20 percent?
Describe the likely consequences for GDP growth when the FOMC directs the trading desk at the New York Fed to sell Treasury securities.
Explain how STRIPs can be used to immunize portfolios against interest rate risk.
Why must the balance of payments always balance?
Why might consumer groups support government policies that maintain a “strong” U.S. dollar?
What are the four types of secondary markets?
What are the tax advantages of qualified private pension plans?
Why are life insurance and life annuities often described as opposites?
What are the largest asset categories on a life insurance company balance sheet?
If you had a 6 percent, $100,000, 15-year mortgage and you paid it as scheduled, how much interest would you pay in the first month of the sixth year on that mortgage? How much principal would you pay?

MULTIPLE-CHOICE QUESTIONS

Which of the following is
not

an example of capital market securities?

  1. common stocks

  2. convertible bonds

  3. commercial paper

  4. mortgages



In a board of director’s election for five directors and straight voting, a majority group of shareholders will elect

  1. four directors.

  2. five directors.

  3. four or five depending on how the cumulative voters vote.

  4. the same proportional share of directors as their ownership share.



Security exchanges provide a valuable function in that they

  1. create interest in stocks.

  2. increase the marketability of securities.

  3. provide a legal way to gamble.

  4. supply money to deficit spending units.

  5. both
    a
    and
    d



Which of the following is

not

true about American Depository Receipts (ADRs)?

  • ADRs are claims issued by U.S. financial intermediaries (FIs) against shares in foreign companies, with the shares held in custody by the FIs for investors.

  • ADRs are issued in the U.S. and are denominated in U.S. dollars. All cash flows to the investor are in dollars.

  • An ADR enhances a company’s visibility, status and profile in the U.S. and internationally among investors.

  • An ADR decreases the foreign firm’s U.S. liquidity (and potentially total global issuer liquidity).





The Wall Street Journal
publishes T-bill price (bid/ask) based on the ___________ rate; with the __________ rate provided as the quoted (ask) yield on the T-bill.

  1. bond equivalent; bank discount

  2. effective annual; bank discount

  3. bank discount; bond equivalent

  4. bank equivalent; bank discount



Federal Small investors are likely to invest in the money market through ____.

  1. directly; commercial paper

  2. locally; their credit union

  3. indirectly; negotiable CDs

  4. indirectly; money market mutual funds



What is the bank discount rate on a $100,000 face value T-bill priced at $97,500, maturing in 181 days?

  1. 2.50%

  2. 4.84%

  3. 4.97%

  4. 5.10%

  5. 5.17%




TRUE-FALSE QUESTIONS

For large corporations, commercial paper is more expensive but is a more assured alternative to bank borrowing.
Individual investors most often have only indirect access to the money market through commercial banks.
Federal Reserve open market operations, reserve requirement changes, and discount rate policy first impact the economy in the money market.

QUANTITATIVE QUESTIONS

Winters Hi-Hook Inc., a golf club manufacturer, is currently paying dividends of $.50 per share. These dividends are expected to grow at a 20 percent rate for the next two years and at a three percent rate thereafter (forever!). What is the value of the stock if the appropriate discount rate is 14 percent?
You purchase 100 shares of Adams Trading Company stock today for $22.50 per share. At the end of one year, you collect a dividend of $2.75 and then sell the stock at $24.50 per share. What is your total return on the stock? What is the dividend yield? What is the capital gains yield?
Farrell Motors stock has a beta of 1.3. If the market risk premium is 8.5 percent and the risk-free rate is 4 percent, what is the expected return of the stock according to the security market line?
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Answered Same DayDec 23, 2021

Answer To: What cash flows are relevant to the value of stock? Why the Fed was initially established? Suppose a...

David answered on Dec 23 2021
121 Votes
Q. What cash flows are relevant to the value of stock?
A. To value a stock after-tax cash flows are required. There are four popular different measures of cash flows used by practitioners:
(1) expected dividends : Dividends are the cash flows actually paid to equity investors.
(2) expected free cash flows to the firm (FCFF): FCFFs are cash flows available for distribution to debtholders and equityholders.
(3) expected free cash flows to equity (FCFE): FCFEs are the cash flows available for distribution to equityholders.
(4) residual income: Residual income is the amount of earnings during the period that exceeds the investors required return.
Q. Why the Fed was initially established?
A. The United States was financially more unstable before the creation of the Federal Reserve. Before the Federal Reserve was established, the US had two central banks namely: The First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836). They were initially established with 20-year charters each but had to be shut down because Congress could not renew the charters upon expiry mainly due to political reasons. Cash liquidity problems, frequent bank failures and the panics due to them resulted in less investment by international and domestic investors in the U.S. economy. Basically, it was due to J.P. Morgan that government acted on the central banking plans which were into considerations since almost a century. During the Bank Panic of 1907, Wall Street had to approach J.P. Morgan, the strongest private bank entity at that time to lead the nation financially through the crisis that could well result in a full crash and depression in the economy. Morgan was a powerful person and he could convene all the principal financial players and order all their money to flood the system, thus floating the banks that in turn, helped to float the businesses until the panic passed. Owing to the reason that the government had to rely on a private banker for its economic survival forced the necessary legislation to create the central bank, the Federal Reserve.
Q. Suppose a firm’s stock has a beta of 1.2. What will probably happen to the value of the stock if the market decreases by 20 percent?
A. Given beta of the stock = 1.2.
If the market decreases by 20 percent, value of the stock goes down by (-0.2*1.2) = 24 percent.
Q. Describe the likely consequences for GDP growth when the FOMC directs the trading desk at the New York Fed to sell Treasury securities.
A. Selling Treasury securities would reduce bank reserves, money supply in the market, investors would have less money to spend, the bank's availability of funds would be reduced which might increase interest rates, slowing down the economy.
Q. Explain how STRIPs can be used to immunize portfolios against interest rate risk.
A. STRIPS are nothing but zero-coupon bonds. The duration of zero-coupon bonds is its maturity and thus the duration of a portfolio of STRIPS is equal to the maturity of the portfolio (Duration of a portfolio is the weighted average of the individual durations). Now, to immunize a portfolio, we use the concept that if a bond is held up to its duration, the realized yield to maturity equals the expected yield to maturity, which eliminates reinvestment and...
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