a. Merck's common shares i. Merck is authorized to issue 5,400,000,000 shares of common stock. ii. As of December 31, 2007, Merck had issued 2,983,508,675 shares of common stock. iii. The common stock has a par value of $0.01 per share, so 2,983,508,675 shares multiplied by $0.01 each equals $29,835086.75. Merck has listed this as $29.8 million on its balance sheet. iv. Merck owns 811,005,791 shares of treasury stock as of December 31, 2007. v. Issued shares are 2,983508,675 and treasury stock is 811,005,791. The difference between these is shares outstanding: 2,172,502,884 shares. vi. Market capitalization is Merck's closing stock price multiplied by shares outstanding. So, 2,172,502,884 times $57.61, which is more than $125 billion. b. c. Companies pay dividends for many reasons. For example, a company may pay dividends because they have excess profits and have extra cash to pay to their shareholders. This is a positive sign from the company that they care about their shareholders and are sharing profits with them. Alternatively, a company may pay dividends instead of using the extra money to invest, which can indicate that they are not growing. This reason, however, is a negative sign from the company, as it signals that the company is no longer growing. When dividends are paid, the company's share price will typically decrease. d. Companies will repurchase their own shares for multiple reasons. One reason is that the shares are undervalued in the market. The company can repurchase undervalued shares as treasury stock and reissue them when the market price per share is closer to 39 the actual value of the stock. Another reason is that the company wants to take back some of the ownership of the company. Companies sell shares to raise capital to use for operations and other purposes; however, when the company is in a position that it does not require capital, it may buy back some of the shares it had previously sold in order to control the ownership of the company. e. f. g. Merck's treasury stock transactions i. Merck is using the cost method to account for its treasury stock transactions. ii. During the year 2007, Merck purchased 26.5 million shares of treasury stock. iii. To purchase the treasury stock, Merck paid $1,429.7 million in total and $53.95 per share on average. This represents a cash outflow for Merck. iv. Treasury stock is not considered an asset because there is no income generated from owning treasury stock. Assets are typically used in operations or other income-generating activities. Instead, it is classified as equity with a debit balance. h. e. Retained earnings $3,310.7 Dividends payable $3.4 Cash $3,307.3 40 i. Over the two years, Merck's dividend ratios stay approximately the same. There are a few differences, but once rounded, these differences are only a few pennies. The only ratio with a major difference is dividend payout, which is $0.26 higher in 2007 than in 2006. This difference just means that for every dollar of net income, Merck paid $0.26 more in dividends in 2007 than 2006.

70. The market risk premium is the difference between the historical return on the stock

market and the risk-free rate, for every year. Why is it negative for some years?

71. Is it correct to use in the valuation of the shares of a company the "value of the real

net assets" which, according to the Institute of Accounting and Auditing (ICAC),

represents the "book value of shareholder's equity, corrected by increases or

decreasing in value which could be demonstrated, in the case of the goods, rights and

obligations of the company at the reference date?"

72. Is it correct to say that the value of the shares is the "value of the results'

capitalization" which, according to the Institute of Accounting and Auditing (ICAC)

represents "the sum of the expected future results of the company during a certain

period, discounted at the moment of the valuation?"

73. Is it true that a company creates value for its shareholders during a year if it

distributes dividends or if the quotation of the shares increases?