Question 2 (20 marks)

(a) A typical equity section of the firms balance sheet consists of three sections which are common stock outstanding, additional paid-in-capital & retained earnings. Briefly illustrate the THREE (3) sections. (3 marks)

(b) Distinguish the differences between stock splits and stock dividends. (5 marks)

(c) Bond is a type of debt instruments issued by companies or governments to obtain financing for use in their organizations. Explain the characteristics of a typical bond. (4 marks)

(d) Micks broker has shown him two bonds. Each has a maturity of 5 years, a par value of RM1,000, and a yield to maturity of 12 percent. Bond A has a coupon interest rate of 6 percent paid annually. Bond B has a coupon interest rate of 14 percent which is paid annually.

(i) Calculate the selling price for each of the bonds. (4 marks)

(ii) Mick has RM20,000 to invest. Judging on the basis of the price of the bonds, how many of either one could Mick purchase if he were to choose it over the other (Mick cannot really purchase a fraction of a bond, but for the purpose of this question, assume that he can). (2 marks)

(iii) Calculate the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Mick could buy with his RM20,000. (2 marks)