Module 2 Problems

6) Find a story about a recent primary offering in The Wall Street Journal. Based on the information in the story, indicate the characteristics of the security sold and the major underwriters. How much new capital did the firm derive from the offering?

8) Which segment of the secondary stock market (listed exchanges or NASDAQ) is larger in

terms of the number of issues? Which is larger in terms of the value of the issues traded?

Problems: 2, 7

2) Lauren has a margin account and deposits $50,000. Assume the prevailing margin requirement

is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling

at $35 per share.

a. How many shares can Lauren purchase using the maximum allowable margin?

b. What is Lauren’s profit (loss) if the price of Gentry’s stock

i. rises to $45?

ii. falls to $25?

c. If the maintenance margin is 30 percent, to what price can Gentry Wine fall before

Lauren will receive a margin call?

7) The stock of the Madison Travel Co. is selling for $28 a share. You put in a limit buy order

at $24 for one month. During the month the stock price declines to $20, then jumps

to $36. Ignoring commissions, what would have been your rate of return on this investment?

What would be your rate of return if you had put in a market order? What if your limit order was at $18?

CH 05 Security Market Indexes

Questions: 6, 14 

6) Describe an unweighted price index and describe how you would construct such an index.

Assume a 20 percent price change in GM ($40/share; 50 million shares outstanding)

and Coors Brewing ($25/share and 15 million shares outstanding). Explain which stock’s change will have the greater impact on this index.

14) Based on what you know about the Financial Times (FT) World Index, the Morgan Stanley

Capital International World Index, and the Dow Jones World Stock Index, what level

of correlation would you expect between monthly rates of return? Discuss the reasons for

your answer based on the factors that affect indexes.

 Problems: 1, 2

1) You are given the following information regarding prices for a sample of stocks.

PRICE

Stock Number of Shares T T+1

A 1,000,000 60 80

B 10,000,000 20 35

C 30,000,000 18 25

a. Construct a price-weighted index for these three stocks, and compute the percentage

change in the index for the period from T to T + 1.

b. Construct a value-weighted index for these three stocks, and compute the percentage

change in the index for the period from T to T + 1.

c. Briefly discuss the difference in the results for the two indexes.

2. a. Given the data in Problem 1, construct an equal-weighted index by assuming $1,000 is

invested in each stock. What is the percentage change in wealth for this portfolio?

b. Compute the percentage of price change for each of the stocks in Problem 1. Compute

the arithmetic mean of these percentage changes. Discuss how this answer compares to

the answer in Part a.

c. Compute the geometric mean of the percentage changes in Part b. Discuss how this result compares to the answer in Part b.

Work should be submitted in Excel using appropriate Excel functions and formulas .  Excel shall not be used as a “Word” document. Each problem should be professionally presented on a separate, named tab within the submitted Excel file.  Professional presentation of the work submitted is a factor in awarding points for the work. Incorrect work and incorrect analytical process will not earn full points.