What Rights and Advantages Shareholders Obtain as Owners - Essay Example

1. Ownership in the company.
2. Periodic payments of dividends based on company profits.
3. Ability to influence decisions in the stock issuing company.
4. Liquidation rights if the company goes bankrupt.
5. Capital gain on the upward movement of stocks.
6. "Why might the Standard and Poor's 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 indexes is that the Standard and Poor's 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 the largest companies in the U.S. across a range of industries. Both of these measurements are used by investors to determine the trend in the stock market. However, S&P 500 is a better measure as it is more encompassing and includes a greater sample of total U.S. stocks. A 5% change in a $50 stock will affect the index like a 5% change in a $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

The exact amount is not known

Fixed dividend

Liquidity preference

Lesser priority

Priority on payment

Risk

Riskier

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. Safeco's 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