22. Assume you are considering purchasing stock in Company A. The company websit

Question

22. Assume you are considering purchasing stock in Company A. The company website and various stock analysts anticipate that the price of the stock will grow to $210/share by the end of the first year. In addition, they are projecting that a dividend of $5/share will also be paid at the end of the first year. If you demand a 10% rate of return, what would be a fair price for one share of stock? A. $200.00 B. $193.15 C. $202.25 D. $195.45 23. Short term government securities are often issued as "zero coupon" bonds. This means that: A. B. C. D. In exchange for a US Government guarantee the bond offers no interest The bond is sold at a premium and redeemed at face value with no intervening interest payments. The bond is sold at a discount and redeemed at face value with no intervening interest payments. The bond can be redeemed at any time at the option of the holder and interest is determined by the federal funds rate at the time. 24. When a corporation decides to "go public" it retains an investment banker to walk them through the process. The investment banker, or underwriter, helps the business owner determine the right price to enter the market with as well helping with filing of all necessary documents to comply with federal and state security laws. What is the term given to this introductory offering of securities? A. Introductory Primary Omnibus B. Initial Primary Statement C. Investment Banker Declaration D. Initial Public Offering E. Preliminary Stock Offering. 25. Just prior to the introductory offering of the stock, the business owner will typically sell all the stock to the investment banker. This transaction is said to occur in the primary market. A. True B. False

Explanation / Answer

Q1 Solution:

Given details:

Now, we are expected to calculate fair price of 1 share:

By reviewing given details we understand that we need to calculate price of stock by Dividend Discount Model.

Formula:

Dividend         Stock price at the end of year

--------------   +   --------------------------------------

    (1+r)1                                        (1+r)1

Now, Input all given details in formula as follows:

   $5.00                    $210.00

--------------   +     ----------------

(1+0.10)1                       (1+0.10)1

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Q2 Solution

Short term government securities are often issued as “zero coupon” bonds. This means that....

Answer is option C: The bond is sold at a discount and redeemed at the face value with no intervening interest payments.

Explanation: Zero coupon bonds are those bonds which don’t pay interest. Instead of getting interest payments an investor would buy a bond at a discount from the face value of the bond. They are non-callable.

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Q3 Solution

When a corporation decides to “go public” it retains the investment banker to walk tem through the process. The investment banker, or underwriter, helps the business owner determine the right price to enter the market with as well helping with filing of all necessary documents to comply with federal and state security laws. What is the term given to this introductory offering of securities?

Answer is option D: Initial Public Offering

Explanation: When the firm is issuing the shares for the very first time it is called “Initial Public Offering” or “IPO”.

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Q4 Solution

Just prior to the introductory offering of the stock, the business owner will typically sell all the stock to the investment banker. This transaction is said to occur in primary market:

Answer is option B: False

Explanation: Underwriter - Investment banker – buy the stocks from the owner at the negotiated price and then resells them to the investors at the offering price. Whereas the primary market is where the firms float new securities to the public for the first time.

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