Question 1. A publicly held company has common and preferred stock that is held by many investors and is actively traded.
Discuss the questions/statements below:
1. What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock?
2. What is classified stock? When “going public, why might a small company designate some stock currently outstanding as “founders’ shares”?
3. A sinking fund can be set up in one of two ways:
(a) the corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated total to retire the bond issue at maturity;
(b) the trustee uses the annual payments to retire a portion of the issue each year, either calling a given percentage of the issue by a lottery and paying a specified price per bond or buying bonds on the open market, whichever is cheaper.
Given all this, please discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.
Question 2. A firm’s Statement of Cash Flows uses historical information on balance sheets and income statements to estimate cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities to explain the differences over time in a firm’s cash account. Using the same concepts, forecasts over time of a project’s balance sheet accounts and income statement (revenues and expenses) can be used to estimate cash flow from operations and cash flows from investing activities.
Discuss the statements/questions below:
1 Briefly describe what is meant by the time value of money.
2 What is a risk-adjusted discount rate? How are risk-adjusted discount rates determined for individual projects?
3 What is the meaning of discounting? Provide an illustration.
Question 3. Both the variance and standard deviation show the dispersion in returns from the average. The variance’s units, dollars squared or percent squared, are not intuitive to most users. The square root of the variance (s2).50, the standard deviation (s), has units of dollars or percent. If the returns are normally distributed, about 68 percent of the observed return should fall within one standard deviation of the average return; 95 percent should fall within two standard deviations; 99 percent should fall within three standard deviations. Thus, the standard deviation gives the user an idea of the range of the data.
Discuss the questions/statements below:
4 What is meant by the coefficient of variation? How is it used as a measure of risk?
5 Explain the terms diversification and correlation in the context of forming portfolios.
6 Describe the meaning of a “state of nature” and explain how this concept is used to provide expected measures of return and risk.
7 What are the differences among the weak, semi strong, and strong forms of the efficient market hypothesis?
Question 4. Discuss the statements/questions below:
8 Explain marketability risk and marketability premium.
9 Why is risk an increasing function of time?
Discuss how the standard deviation, a statistical measure of dispersion, is used in investment analysis?