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Valuing Stocks - Essay Example

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The major difference between the two index is that the Standard and Poors 500 Index is a market value weighted index of 500 stocks while Dow Jones Industrial Average includes a price weighted average of 30 stocks of largest companies in the U.S across a range of industries. Both…
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Valuing Stocks
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Assignment As owners, what rights and advantages do shareholders obtain?" (Cornett, Adair, and Nofsinger, p. 172). Solution: Rights of Shareholders
a. To receive shares after allotment or transfer in due time.
b. To receive company documents like abridged Annual Report, the Balance sheet, the Profit and Loss account and the Auditors’ Report.
c. To receive Dividends in due time after approval in General Meetings.
d. To receive corporate benefits like right, bonus etc. after approval.
e. To participate and vote in General Meetings either personally or through proxies.
f. To receive the residual proceeds.
Advantage to Shareholders
a. Ownership in the company.
b. Periodic payments of dividends based on company profits.
c. Ability to influence decision in the stock issuing company.
d. Liquidation rights if the company goes bankrupt.
e. Capital gain on upward movement of stocks.
2. "Why might the Standard and Poors 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average?" (Cornett, Adair, and Nofsinger, 2012, p. 172).
Solution:
The major difference between the two index is that the Standard and Poors 500 Index is a market value weighted index of 500 stocks while Dow Jones Industrial Average includes a price weighted average of 30 stocks of largest companies in the U.S across a range of industries. Both of these measurements are used by investors to determine the trend in stock market.However,S&P 500 is a better measure as it is more encompassing and includes greater sample of total U.S stocks. A 5% change in a $50 stock will affect the index like a 5% change in $100 stock, being a market value weighted index. The DJIA is price weighted and the average stock movement is widely affected by the large stocks.
3. "What are the differences between common stock and preferred stock?" (Cornett, Adair, and Nofsinger, 2012, p. 172).
Solution:
Parameters
Common Stock
Preferred Stock
Voting Rights
One vote per share
No voting rights
Dividend
Exact amount not known
Fixed dividend
Liquidity preference
Lesser priority
Priority on payment
Risk
More risky
Less risky
4. On January 16, 2007, the Dow Jones Industrial Average set a new high. The index closed at 12,582.59, which was up 26.51 that day. What was the return (in percent) of the stock market that day?" (Cornett, Adair, and Nofsinger, 2012, p. 173).
Solution:
Return(%)= (P1-P0)/P0
= (26.51)/ (12582.59-26.51)
= 0.21
P1= New Index value
P0= Old index value
5. "At your discount brokerage firm, it costs $9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc. (TWX), which trades at $22.62?" (Cornett, Adair, and Nofsinger, 2012, p. 173).
Solution:
(No. of Shares * Share-Value) + Dealer costs = Total Cost
(300 * 22.62) + 9.5 = $ 6795.50
6. Financial analysts forecast Safeco Corp. (SAF) growth for the future to be a constant 10 percent. Safecos recent dividend was $1.20. What is the value of Safeco stock when the required return is 12 percent?" (Cornett, Adair, and Nofsinger, 2012, p. 174).
Solution:
P0 = D1*(1+g)/ (K-g)
= 1.20*1.10/ (0.12-0.10)
= $66
7. A preferred stock from Duquesne Light Company (DQUPRA) pays $2.10 in annual dividends. If the required return on the preferred stock is 5.4 percent, what is the value of the stock?" (Cornett, Adair, and Nofsinger, 2012, p. 173).
Solution:
Pp= Dp/r
= $2.10/.054
= $38.88
Pp = the preferred stock price,
Dp = the preferred dividend, and
r = the required return on the stock.
8."Ultra Petroleum (UPL) has earnings per share of $1.56 and a P/E ratio of 32.48. What is the stock price?" (Cornett, Adair, and Nofsinger, 2012, p. 173).
Solution:
P/E=Stock price / Earnings per share
32.48 = Stock price / 1.56
=> Stock Price = $50.66 Read More
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