...Identify the components of a stock’s realized return. “The realized return is the total realized return that happens during a specific period (Jonathan Berk, 2010, p. 388).” The components consist of the stock price that it was bought, the price it was sold, and also the dividend. To calculate the stock’s realized return begin by dividing the dividend by amount that it was bought and adding it to the difference between the amount that it was sold by the amount that it was bought and finally dividing that by the amount that it was bought (Jonathan Berk, 2010, pp. 338-341). This will be the last component to a realized return. Contrast systematic and unsystematic risk. “Unsystematic risk is fluctuations of a stock’s return that are due to company or industry specific news” (Jonathan Berk, 2010, p. 353). This is associated with random causes that can be eliminated through diversification. It’s attributed to firm-specific events such as strikes, lawsuit, regulatory actions, or a loss of a key account. Unsystematic risk is due to factors specific to an industry like labor unions, product category, research and development, pricing, or marketing On the other hand, systematic risk occurs when fluctuations of the stocks returns are changed because of market wide news (Jonathan Berk, 2010, p. 353). These market factors may include situations such as war, inflation, international incidents, or political events. It may be eliminated through diversification and the combination of...
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...Chapter 5 (Basic Stock Valuation): Problems (Page 182-183): #1, #2, #4, #6, #8, #9 #11, #12, and #13. 5-1 ∵ Last dividend (D0) $1.50 First 3 year growth rate 5% Long-run growth rate 10% ∴ g = 5% g = 10% Year 0 1 2 3 4 5 Dividend $1.50 $1.50(1.05) $1.50(1.05)2 $1.50(1.05)3 $1.74(1.1) $1.91(1.1) $1.50 $1.58 $1.65 $1.74 $1.91 $2.11 5-2 (Hint: Find the intrinsic value of the common stock if the dividends are expected to grow at a constant rate) ∵ Dividend at the end of the year (D1) $1.50 Constant growth rate (g) 7% Required rate of return (rS) 15% ∴ The value per share of the company’s stock (＾P0) = D1 / (rs – g) = $1.50 / (15% - 7%) = $18.75. 5-4 ∵ Preferred dividend (DPS) $5 Value of preferred stock (VPS) $50 ∴ Required rate of return (rPS) = DPS / VPS = $5 / $50 = 0.10 = 10%. 5-6 ∵ Price (＾P0) $80 A year-end dividend (D1) $4 Required rate of return (rS) 14% ∴ g = rS – (D1 / P0) = 14% - ($4 / $80) = 9% 5-8 ∵ Preferred dividend (DPS) $100 * 8% = $8 Current market price (VPSa) $60 (VPSb) $80 (VPSc) $100 (VPSd) $140 ∴ Nominal rate of return: ra = DPS / VPSa = $8 / $60 = 13.33% rb = DPS / VPSb = $8 / $80 = 10.00% rc = DPS / VPSc = $8 / $100 = 8.00% rd = DPS / VPSd = $8 / $140 = 5.71% 5-9 (Hint: the growth rate of the dividends is negative) ∵ g = - 4% D0 = $5 rS = 15% ∴ The value of Brushy Mountain’s stock (＾P0) = D0 (1 + g) / (rs – g) = $5 (1 – 4%) / (15% + 4%) = $25.26. 5-11 (Hint:...
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...Harvard Business School 9-899-097 Rev. November 19, 1998 Walnut Venture Associates (D): RBS Deal Terms It was Friday, June 5, 1998, and Bob O’Connor was headed home for the weekend. He knew it would be a busy one, for he had many decisions to make. He had been trying to raise capital for his Company – the RBS Group, a software firm – for almost a year. He felt like he was finally nearing the end of this process, but now more issues had arisen. First, his prospective investors wanted to increase the amount of their investment. While he would be happy to have the extra money, he felt that the valuation on RBS was already lower than he had hoped, and he was reluctant to take more money at this price. Second, he had received a draft term sheet the day before. He’d only had a few minutes to scan it, but it seemed a long way from the simple deal they’d discussed weeks before. O’Connor knew he would be spending a lot of time with this document over the coming weekend. Background Wagner and other “angels” from the Walnut group had successfully gotten over several of the issues that had arisen during their due diligence process. (See Walnut Ventures Associates (A), (B) and (C) Nos.899-062, 063 and 064) Wagner described those issues and the due diligence process: The customer feedback was all quite good. O’Connor was a great salesman. The issue was: Is he a one man band? And we decided – yes, he was a one man band, but more by necessity than by choice. After watching him in...
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...that company operate have flexible return then company’s within-firm risk is higher. Stand-alone risk is the variability of project’s expected return. More risky the project is, the higher flexibility of expected return of that project. Stand-alone risk is more powerful. If stand-alone risk is very high or projects return is highly volatile and it affects the return of other assets of the company or other assets in the economy then it will affect corporate as well as market risk. However, if stand-alone risk of project is higher but not correlated with the return of other assets of the company then it does not affect corporate risk. Of the three measures, market risk is theoretically most relevant because market risk has direct effect on stock prices and hence reflects the changes on economy as a whole. 9-2 LL Incorporated’s currently...
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...MULTIPLE CHOICE (5 Points Each) 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this investment in 2013? A. $16,500. B. $9,000. C. $25,500. D. $7,500. E. $50,000. 2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2013, how much income should Yaro recognize related to this investment? A. $24,000. B. $75,000. C. $99,000. D. $51,000. E. $80,000. 3. On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2013 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2013? A. $2,040,500. B. $2,212,500. C. $2,260,500. D. $2,171,500. E. $2,071,500. 4. A company should always use the equity method to account for an investment if: A. It has the ability to exercise...
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...primarily on two factors; 1) whether MCI can expand market share as forecasted amid the increasing competition with AT&T and 2) whether they can sustain good profitability as forecasted amid a concern that AT&T might decrease their pricing. 2. Discuss MCI’s past financial strategy, paying attention to the types of securities issued. After the initial public offering in 1972 and the additional common stock offering in 1975, from 1978 the company accelerated the financing activities due to the larger capex required, namely, 1) Convertible preferred stock in 1978, 1979 and 1980 at the cost of 10.5~12.3% 2) Subordinated debentures in 1980, 1981 and 1982 at the cost of 15.0~16.8% 3) Convertible subordinated debenture in 1981, 1982 and 1983 at the cost of 7.8~10.3% Convertible preferred stock: The company issued preferred stock of $25.8 million in 1975 and $ 63.1 million in 1979. This is because 1) the company believed that issuing common stock would deteriorate the stock price, 2) corporate purchasers of preferred stock and the company could enjoy the tax advantage of the preferred stock especially during the time the company’s profitability was sheltered by the carryforward of past losses and 3) with call option, the company could stop...
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...E17-1 (Investment Classifications) For the following investments, identify whether they are: * 1.Trading * 2.Available-for-Sale * 3.Held-to-Maturity Each case is independent of the other. * (a)A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold. * (b)10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock. * (c)10-year bonds were purchased this year. The bonds mature at the first of next year. * (d)Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. * (e)A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now. * (f)Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time. E17-2 (Entries for Held-to-Maturity Securities) On January 1, 2012, Jennings Company purchased at par 10% bonds having a maturity value of $300,000. They are dated January 1, 2012, and mature January 1, 2017, with interest receivable December 31 of each year. The bonds are classified in the held-to-maturity category. Instructions * (a)Prepare the journal entry at the date of the bond purchase. * (b)Prepare the...
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...CHAPTER 7 COMMON STOCK: CHARACTERISTICS, VALUATION AND ISSUANCE ANSWERS TO QUESTIONS: 1. a. Nonvoting stock - common stock that is issued when the firm wishes to raise additional equity capital but does not want to give up voting power. b. Stock split - the issuance of a number of new shares in exchange for each old share held by a stockholder in order to lower the stock price to a more desirable trading level. c. Reverse stock split - the issuance of one new share in exchange for a number of old shares held by a stockholder in order to raise the stock price to a more desirable trading level. d. Stock dividend - a dividend to stockholders in the form of additional shares of stock instead of cash. e. Book value - total common stockholders' equity divided by the number of shares outstanding. f. Treasury stock - shares of common stock that have been repurchased by the company. 2. No, the retained earnings figure on the balance sheet is simply the cumulative amount of earnings that have been retained over time. At the time when income is retained, these dollars may be used to purchase additional long-term assets. As a result, the retained earnings amount is not available for current dividends. Current dividends are paid out of cash (or earnings) and not out of retained earnings. 3. Reasons for stock repurchases: • tax considerations – Under current tax laws, capital gains income is taxed at lower rates than...
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...of Common and Preferred Stock) Jan 10 Cash 400,000 80,000*5 Common Stock 160,000 2*80,000 Paid in capital 240,000 3*80,000 Mar 1 Cash 540,000 108*5,000 Preferred Stock 250,000 50*5,000 Paid in capital 290,000 58*5,000 Apr 1 Land 80,000 Common Stock 48,000 2*24,000 Paid in capital 32,000 80,000-48,000 May 1 Cash 560,000 7*80,000 Common Stock 160,000 2*80,000 Paid in capital 400,000 5*80,000 Aug 1 Company Expense 50,000 Common Stock 20,000 2*10,000 Paid in capital 30,000 50,000-20,000 Sept 1 Cash 90,000 9*10,000 Common Stock 20,000 2*10,000 Paid in capital 70,000 7*10,000 Nov 1 Cash 112,000 112*1,000 Preferred Stock 50,000 50*1,000 Paid in capital 62,000 62*1,000 E15-3 (Stock Issued for Land) A Land 1,500,000 60*25,000 Treasury Stock 1,200,000 45*25,000 Paid in capital 300,000 B The price of the stock is probably the best price when its fair value in the transaction. E15-5 (Lump-Sum Sales of Stock with Preferred Stock) A Common 84,000 168*500 Preferred 21,000 210*100 Total 105,000 Allocated Common 80,000 84,000/105,000*100,000 Allocated Preferred 20,000 21,000/105,000*100,000 Total 100,000 Cash 100,000 Common Stock 5,000 5*1,000 Paid in Capital common stock 75,000 80,000-5,000 Preferred Stock 10,000 100*100 Paid in capital preferred stock 10,000 20,000-10,000 B Lump Sum 100,000 Allocated Common ...
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...Jody Choate 12/15/12 Preferred Stocks meaning A corporation can issue two types of stock: common and preferred. Common stock is partial ownership in a company and these are the shares usually referred to when discussing a company's stock. Preferred stock pays higher dividends and offers investors different opportunities for income investing. Investors should look at common and preferred stocks in very different ways. Companies issue preferred shares as a way to raise capital instead of borrowing money by issuing bonds. Most preferred shares are issued with a fixed dividend rate that the company must pay before paying any dividend to common shareholders. The majority of preferred stock issues do not have an expiration date, so the issuing company is not required to pay back the money raised as it would if it issued bonds. Preferred shares can be issued with different features that make them more attractive to investors. Cumulative preferred shares are entitled to make up any missed dividend payments before dividends are paid on common shares. Adjustable preferred shares have their dividends changed in line with some market interest rate. This protects shareholders in a rising rate environment. Convertible preferred shares could be exchanged for common shares at a pre-determined ratio Investors buy preferred shares primarily an income investment to receive the regular dividends. Although preferred have preference over common stock to receive dividends, preferred...
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...of operations in 2011 ($741.152+$34.96) | | $776.11 | PVIF@11% | | 0.9009 | | | | PV of Horizon Value in 2010 (0.901 x $776.11), $ millions | = | $699.20 | | | | d) | | | | Non-operating Assets = Marketable Securities + Investment in Other Business | Marketable Securities | | $49.9 | | Investment in Other Business | | 0 | | Total Intrinsic Value = Value of operations + Non-operating Assets | | Total Intrinsic Value of the Company ($699.2 + $49.9), in $ millions | $749.10 | | | | | e) | | | Total Intrinsic Value of Firm | $749.10 | | Less Notes Payable | (69.90) | | Less Long Term Bonds | (140.80) | | Less: Preferred Stock | (35.00) | | Intrinsic Value of Common Stock | 503.40 | | | | | Total Number of...
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...Stocks Heather Anderson 11/17/2014 XACC/291 Celena Hudak Preferred Stocks Preferred stock is a type of stock issued by a business that usually pays a fixed dividend prior to any distributions to the holders of the common stock of the business. (Tools, 2014) Preferred stock has voting rights. Preferred stock dividends may be stated as a fixed amount (such as $5) or as a percentage of the stated price of the preferred stock. For example, a 10% dividend on $80 preferred stock is an $8 dividend. (Tools, 2014) There are many features in preferred stock that to have investors want to buy or making it easier for a company to buy back the stock. A company can have callable. This gives the company the ability to buy the stock back at a specific date and predetermine price. Convertibility gives investors the option to convert their preferred stock into a pre-determined number of shares of the company's common stock at some point in the future. Cumulative feature forces the company to pay the full amount of dividends not paid before they can common stockholders. Participative this feature can really cut into the common stockholders and many companies’ only uses this if there is no other means of raising capital. All of the features listed above are attractive to investors except for callable. Preferred stock is offset by the callability, interest-rate and other risk factors that come along for the ride. And while some investors might be perfectly willing to take on these risks...
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...Executive Summary This article outlines a real life situation involving a company called Metapath which was formed in January 1995. The company wanted to build a software product which enabled wireless telephone network operators to see exactly what calls were on their networks at any point in time. The company started out poorly with only one contract, but after they received a new round of financing from Norwest Capital and US Venture Partners, they acquired a new contract worth $19 million from Sprint. Metapath then received two very different offers, one from a venture capital firm called RSC which involves $11.75 million of stock at a pre-money valuation of $76 million. The other is from a public company called CellTech Communications, which only recently went public, valued at $115 million. CellTech’s offer would provide Metapath shareholders with near term liquidity at an attractive price; this would also not dilute the existing shareholder base like other financing and does not need an IPO. Whereas the financing proposed by RSC could possibly dilute the founders shares significantly, once an IPO is conducted further down the road. The board of Metapath believe they have potential as an independent public company, and they wonder if the merger with CellTech makes financial and operational sense. We discuss the associated issues involved in Metapath as well as the offers by RSC and CellTech. The two offers are also analysed with both the benefits and the disadvantages...
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...Advantages and Disadvantages of Preferred Stock Preferred stock offers several advantages and disadvantages when compare to common stock. It gains its name for the fact that it takes priority over common stock dividends are to be paid. In other words, preferred shareholders will also take precedence over common shareholders in the event a company is liquidated, however, they will not take precedence over creditors. From the investors’ perspective, a preferred stock is much less of a risk to own because the fixed dividend payments are guaranteed. In addition, the interest yield of preferred stocks is known for being less volatile than bonds. An important drawback of most preferred stocks is that they do not provide voting rights for the shareholder. In many ways, a preferred security works like a hybrid of a stock and bond. The face value of the asset is not going to fluctuate very much, thus leaving out the possibility for a windfall profit. In exchange, the holder of a preferred security will enjoy a steady stream of guaranteed dividend payments. It also provides the peace of mind knowing that your claims to assets will have priority if the company ever goes bankrupt. As an investment, I would choose common stock. Although the risk can be higher, there is a greater potential to experience a very large profit. If I was a significant shareholder in a company, I would choose common stock because it provides voting rights that can be used to vote on corporate affairs. This provides...
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...9-807-027 REV: AUGUST 1, 2008 ROBERT F. HIGGINS VIRGINIA A. FULLER NatuRi Corporation In February 2006, Aravind Cherukuri and Kartik Natarajan were reviewing their options for raising capital for NatuRi Corporation, the company they had founded together in 2005. With operations split between Chennai, India, and Boston, Massachusetts, NatuRi had developed a biological compound that showed promising effects in cholesterol management. The compound, discovered by Aravind’s mother, biological scientist Rukmini Cheruvanki, was derived from the byproducts of rice bran oil (RBO) production. Early animal trials had demonstrated that the compound was effective in lowering “bad” cholesterol while simultaneously increasing levels of “good” cholesterol. If manufactured for human ingestion, the compound would provide a natural alternative to synthesized cholesterol-lowering drugs on the market. Although NatuRi was still in the start-up stage, it had captured the attention of at least four potential investors willing to offer a seed investment. Having just received a term sheet from Waltham Partners, a well-known East Coast venture capital firm, Aravind and Kartik were now forced to weigh their options and determine which of the four potential investors currently interested in their venture would be most appropriate for NatuRi’s future growth. Their funding decision for this stage would also impact options for later rounds of funding. The duo had to decide on NatuRi’s ...
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