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fundamentals of investing
Questions and Answers of
Fundamentals Of Investing
Define a preferred stock. What types of prior claims do preferred shareholders enjoy? How do trust preferreds differ from traditional preferreds?
Briefly describe each of the following, and note how each differs from a conventional preferred stock.a. Convertible preferredsb. Floating-rate preferredsc. Prior preferred stocksd. Trust preferreds
An adjustable-rate preferred share is currently selling at a dividend yield of 9%. Assume that the dividend rate on the stock is adjusted once a year and that it is currently paying an annual
Kathleen “Penni” Jock is a young career woman who has built a substantial investment portfolio. Most of her holdings are preferred stocks—a situation she does not want to change. Penni is now
Preferred stock is a unique type of equity and is referred to as a hybrid security—it has characteristics of both bonds and common stock. In practice, preferred stocks are valued more like bonds,
The regular dividend on Hecla Mining preferred stock is \($0.875\) per quarter, or \($3.50\) per year. In December 2015, Hecla Preferred shares sold for \($57.\) What was their dividend yield?
In what ways is a preferred stock like equity? In what ways is it like a bond?
Is it possible for a firm to pass (miss) dividends on preferred stocks, even if it earns enough to pay them? Explain. What usually happens when a company passes a dividend on a cumulative preferred
The Bullorbear Company has 500,000 shares of \($2\) preferred stock outstanding. It generates an EBIT of \($40\) million and has annual interest payments of \($2\) million. Given this information,
What are the advantages and the disadvantages of investing in preferreds?
The Bullorbear Company has 500,000 shares of \($2\) trust preferred stock outstanding. The firm generates an EBIT of \($40\) million and has annual interest payments of \($2\) million.Given this
Distinguish a cumulative preferred share from a callable preferred share. Do cumulative dividend provisions and call features affect the investment merits of preferred issues? Explain.
You purchased 100 shares of a \($2\) preferred stock 1 year and 1 day ago for \($25\) per share. You sold the stock today for \($30\) per share. Assuming you are in a 25% tax bracket, calculate your
Describe how high-grade preferred stocks are priced in the market. What role does dividend yield play in the valuation of preferred stocks? Could you use the zero-growth dividend valuation model to
Assume that you are evaluating several investments, including the stock of a mature company that pays annual dividends of \($2\) and is currently trading at \($25.\) Another investment is a trust
Select one of the preferred stocks listed in Table 16.1—assume the dividends qualify for the preferential tax rate. Using the resources at your campus or public library or on the Internet,
Discuss why dividend yield is critical in evaluating the investment merits of high-grade preferred stocks during periods when market yields are expected to decline.
Identify several investment uses of preferred stocks. Would preferreds be suitable for both conservative and aggressive investors? Explain.
Sara-J Co. has a preferred stock outstanding that pays annual dividends of $3.50 a share. At what price would this stock be trading if market yields were 7.5%? Use one of the dividend valuation
Charlene Weaver likes to speculate with preferred stock by trading on movements in market interest rates. Right now, she believes the market is poised for a big drop in rates.Accordingly, she is
Using Table 17.1, calculate Ed Robinson’s income tax due on his $35,000 taxable income, assuming that he files as a single taxpayer. After you make the calculation, explain to Ed what his marginal
Obtain a copy of the most recent year’s Form 1040 (U.S. Individual Income Tax Return), along with Schedules A (Itemized Deductions), B (Interest and Dividend Income), and D (Capital Gains and
Hal and Terri Wilson had most of their funds invested in common stock in late 2016. The Wilsons didn’t really do very much investment planning, and they had practically no background or
What is tax planning? Describe the current tax rate structure and explain why it is considered progressive.
During the year just ended, Jean Sanchez’s taxable income of \($48,000\) was twice as large as her younger sister Rachel’s taxable income of \($24,000.\) Use the tax rate schedule in Table 17.1
Assume you have a sizable gain on 200 shares of stock that you bought 2 years ago for \($22\) per share and that is now (December 15) selling for \($50\) per share. Given a just announced tax rate
What is a capital asset? Explain how capital asset transactions are taxed, and compare their treatment to that of ordinary income.
Sheila and Jim Mendez reported the following income tax items in 2014:If Sheila and Jim claim 3 dependents and file a joint return for 2014 (with taxes due by April 15, 2015), calculate their income
Imagine that, given your current age and marital status, you have decided to make the maximum contribution to an individual retirement arrangement (IRA) each year from now until age 65. (Assume that
Describe the steps involved in calculating a person’s taxable income. How do tax credits differ from tax deductions?
The Akais just finished calculating their taxable income for their 2014 joint federal income tax return. It totaled \($68,750\) and showed no tax credits. Just prior to filing their return, the Akais
Obtain from a licensed salesperson or stockbroker a prospectus and any other literature available on a popular deferred annuity. Analyze the terms, and answer the following questions.a. What is the
How does tax avoidance differ from tax deferral? Explain whether either of these is a form of tax evasion.
Shawn Healy bought 300 shares of Apple Computer common stock at \($132\) a share. Fifteen months later, in December, Apple was up to \($147\) a share and Shawn was considering selling her shares
What is a tax shelter? What is the tax advantage of organizing certain business activities as a sole proprietorship or a partnership rather than as a corporation?
Karen Jones purchased 200 shares of Mex Inc. common stock for \($10\) per share exactly 2 years ago, in December 2014. Today, December 15, 2016, the stock is selling for \($18\) per share. Because
What is tax-favored income? Briefly describe the following forms of income excluded from taxation.a. Tax-free municipal bond interestb. Treasury and government agency issuesc. Sale of a personal
Juan Gonzalez, a single person working for Harla, Inc., will earn \($48,000\) in 2015 and contribute \($7,000\) to the firm’s 401(k) plan. If Juan is in the 25% tax bracket, what will his
Explain conditions that favor the following strategies for deferring tax liabilities to the next year.a. A put hedgeb. Selling a deep-in-the-money call option When is it best simply to hold the stock
Briefly describe each of the following programs for deferring taxes to retirement.a. 401(k) plansb. Keogh plansc. Individual retirement arrangements (IRAs)
Describe and compare the key features of each of the following types of individual retirement arrangements.a. Traditional deductible IRAb. Roth IRAc. Nondeductible IRAd. SIMPLE IRA
Describe and compare the key features of the following types of educational savings plans.a. Coverdell Education Savings Account (ESA)b. Section 529 College Plan
What are guaranteed investment contracts (GICs), and what role do they play in 401(k) plans? What investment vehicles might be suitable for funding a Keogh or IRA?
Briefly describe each of the following strategies that trade current income for capital gains income.a. Growth stocksb. Deep-discount bondsc. Income property depreciation
Describe how a tax swap can be used to reduce or eliminate a tax liability without significantly altering the composition of one’s portfolio.
Define an annuity, explain the role it might play in an investment portfolio, and differentiate betweena. single-premium and installment annuities.b. immediate and deferred annuities.c. fixed and
Define the following terms as they are related to deferred annuities.a. Current interest rateb. Minimum guaranteed interest ratec. Payout
Explain how a deferred annuity works as a tax shelter. How does a tax-sheltered annuity work, and who is eligible to purchase one? Discuss whether a deferred annuity is a better tax shelter than an
Discuss the investment suitability of a deferred annuity, particularly its positive and negative features. Briefly describe the procedures for buying annuities.
How does a limited partnership (LP) differ from a corporation and a general partnership? How did the Tax Reform Act of 1986 affect the popularity of LPs as tax shelters?
What is a limited liability company (LLC) and why has it become a popular business entity?
Frieda Wannamaker is a taxable investor who is currently in the 28% income-tax bracket. She is considering purchasing a tax-exempt bond with a yield of 3.75%.The taxable equivalent yield on this bond
Technical analysis looks at the demand and supply for securities based on trading volumes and price studies. Charting is a common method used to identify and project price trends in a security. A
Holding constant all other variables and excluding any interactions among the determinants of value, which of the following would most likely increase a firm’s price-to-earnings multiple?a. The
A rationale for the use of the price-to-sales (P/S) approach is:a. Sales are more volatile than earnings.b. P/S ratios assess cost structures accurately.c. Revenues are less subject to accounting
A cyclical company tends toa. have earnings that track the overall economy.b. have a high price-to-earnings ratio.c. have less volatile earnings than the overall market.
Consider a company that earned \($4.00\) per share last year and paid a dividend of \($1.00.\) The firm has maintained a consistent payout ratio over the years and analysts expect this to continue.
You hear a market analyst on television say that the advance/decline ratio for the session was 1.2. What does that mean?
A stock’s current dividend is \($1\) and its expected dividend is \($1.10\) next year. If the investor’s required rate of return is 15% and the stock is currently trading at \($20.00,\) what is
At the end of a trading day you find that on the NYSE 2,200 stocks advanced and 1,000 stocks declined. What is the value of the advance-decline line for that day?
A firm has total revenues of \($187,500,\) net income of \($15,000,\) total current liabilities of \($50,000,\) total common equity of \($75,000,\) and total assets of \($150,000\).What is the
A stock currently pays a dividend of $2.00 per share. Expected dividend growth is 20% for the next three years and then is expected to revert to 7% thereafter indefinitely.The required rate of return
The required rate of return used in equity valuation is influenced most by which of the following?a. Expected inflationb. Actual inflationc. The ability to sell short
Confirmation bias is the tendency for investors toa. focus on information that confirms prior opinions and actions.b. be overconfident in forecasting future growth.c. feel responsible for poor
Which of the following would provide the most compelling evidence contradicting the semi-strong form of the efficient markets hypothesis?a. Transactions costs are high.b. Low P/E stocks have positive
The strong-form efficient market hypothesisa. assumes that no one has an informational advantage.b. assumes that certain groups have access to privileged information.c. directly challenges the
The cash flow component of bond investments is made up of the annual interest payments and the future redemption value or its par value. Just like other time-value-of-money considerations, the bond
All bonds are priced according to the present value of their future cash flow streams. The key components of bond valuation are par value, coupon interest rate, term to maturity, and market yield. It
Sinking funds are most likely toa. reduce credit risk (default risk).b. never allow issuers to retire more than the sinking fund requirement.c. always reduce the outstanding balance of the bond issue
A bond portfolio manager gathered the following information about a bond issue:If yields are expected to decline by 75 basis points, which of the following would provide the most appropriate estimate
An analyst stated that a callable bond has less reinvestment risk and more price appreciation potential than an otherwise identical noncallable bond. The analyst’s statement most likely isa.
Treasury STRIPS are securities created by stripping the coupon and principal payments made by an ordinary bond and selling them as individual securities. A U.S.Treasury note with exactly 4 years to
The present value of a $1,000 par value, zero-coupon bond with a three-year maturity assuming an annual discount rate of 6% compounded semiannually is closest toa. $837.48.b. $839.62.c. $943.40.
A bond with 14 years to maturity and a coupon rate of 6.375% has a yield to maturity of 4.5%. Assuming the bond’s YTM remains constant, the bond’s value as it approaches maturity will most
A coupon-bearing bond purchased when issued at par value was held until maturity during which time interest rates rose. The ex-post realized return of the bond investment most likely wasa. above the
An analyst accurately calculates that the price of an ordinary, noncallable bond with a 9% coupon would experience a 12% change if market yields increase 100 basis points. If market yields decrease
A bond with a par value of $1,000 has a duration of 6.2. If the yield on the bond is expected to change from 8.80% to 8.95%, the estimated new price for the bond following the expected change in
Go to Yahoo! Finance and look up data on the Vanguard 500 Index Investor fund (ticker symbol VFINX) and the Fidelity Magellan Fund (ticker symbol FMAGX). These are among the largest mutual funds in
In the Wall Street Journal, open-end mutual funds are listed separately from other securities. They have their own quotation system where the primary data variables are the net asset value (NAV) and
Based on the information on the Blackrock website (https://www.blackrock.com/ca/individual/en/library), describe the iShares Conservative Short Term Strategic Fixed Income ETF. Select any ETF from
While most people believe that it is not possible to consistently time the market, there are several plans that allow investors to time purchases and sales of securities. These are referred to as
An analyst compared the performance of a hedge fund index with the performance of a major stock index over the past eight years. She noted that the hedge fund index (created from a database) had a
Emmanuel Adewale, 25 years old, works in Abuja as a customer relationship manager at a major bank. His current personal portfolio is made mostly of bonds (60%), value stocks (20%), and ETFs (20%)
In-kind redemption is a process available to investors participating ina. traditional mutual funds but not exchange-traded funds.b. exchange-traded funds but not traditional mutual funds.c. both
Does trading take place only once a day at closing market prices in the case of exchange-traded funds? C. a. No b. No Yes traditional mutual funds? No Yes No
Do funds that are likely to trade at substantial discounts from their net asset values include exchange-traded funds? a. No b. No C. Yes closed-end funds? No Yes No
Forms of real estate investment that typically involve issuing shares that are traded on the stock market includea. real estate investment trusts but not commingled funds.b. commingled funds but not
Western Investments holds a fixed-income portfolio that comprise four bonds whose market values and durations are given in the following tableThe portfolio’s duration is closest toa. 6.06b. 6.25c.
You have just learned about the mechanics of margin trading and want to take advantage of the potential benefits of financial leverage. You have decided to open a margin account with your broker and
Describe some of the ways in which you think online trading has transformed investment strategies, particularly by non-institutional investors. What, according to you, are the benefits and risks
Allen Morgan has bought a round lot of Apple, Inc., common stocks, which are traded on the NYSE at the price of $100 per share. Allen is afraid that the price of Apple stocks may fall during the day,
If you place a stop-loss order to sell at \($35\) on a stock currently selling for \($38\) per share, what is likely to be the minimum loss you will incur on 80 shares if the stock price declines to
Peter Tanaka is interested in starting a stock portfolio. He has heard many financial reporters talk about the Dow Jones Industrial Average as being a proxy for the overall stock market. From
Two investments offer a series of cash payments over the next four years, as shown in the following table.a. What is the total amount of money paid by each investment over the four years?b. From a
Refer to the table in Problem 4.5. What is the expected total return in dollars and as a percentage of your original investment if you purchase 100 shares of the investment at the beginning of 2014
Suppose that on January 1, 2016, you place \($1,000\) into an account that earns 5% interest and interest compounds each year. You plan to withdraw \($300\) at the beginning of 2017, but you will
Once again, suppose that on January 1, 2016, you invest \($1,000\\) in an account that pays 5% interest. As before, you have plans to withdraw \($300\) after one year and to deposit and additional
Using a financial calculator or spreadsheet, calculate the following:a. The future value of a $223 deposit left in an account paying 7% annual interest for eight years.b. The future value at the end
Using a financial calculator or spreadsheet, calculate the future value in four years of $15,000 invested today in an account that pays a stated annual interest rate of 10%, compounded monthly.
If you deposit $1,000 into an account at the end of each of the next three years and the account pays an annual interest rate of 4%, how much will be in the account after three years?
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