Corporate Investment - Essay Example

Download file to see previous pages Some of the junk bonds are very profitable but they have the highest risk for investment losses. Individuals and corporations must carry out appropriate risk management when purchasing bonds.
The issuer make announcement that bonds are to be issued. Usually, the bond is associated with a face value that is redeemed when it is sold by the purchaser in open market. The bond is issued at a value less than the face value, the difference is the profit for the purchaser. The underwriter takes its commission also. Once the purchaser buys the bond, he/she can sell it in the open secondary market or can keep it till maturity when full face value of the bond will be returned by the issuer. If bond is traded before maturity, the selling price is lower than the face value to accommodate profits for the next purchaser.
Though bond and stock markets operate separately, yet stock market does have an impact on bond market. The company whose shares are trading at premium in stock market has a better chance to get its bonds purchased by many purchasers. Also, they are in a position to sell bonds at a higher discount rate to minimize its own losses when the bond face value is to be returned at the time of maturity. A company that is not doing well on stock market also faces difficulty in selling its bonds in bond market.
I think lower taxes on dividend and ca...
A company that is not doing well on stock market also faces difficulty in selling its bonds in bond market.
PART 2
Data:
500 shares at $30 per share = $15,000
Initial Margin requirements = 55%
= (15000)(0.55)
= $8,250
Hence, Loan amount = 15,000 - 8,250
= $6,750
Interest payment = 13%
= (6750)(0.13)
= $877.5
Dividends received = $1 per share
= $500 (for 500 shares)
1. Sold stock for $40 per share:
Total earnings from sale = (500)(40)
= $20,000
Total earnings + dividends = 20,000 + 500
= $20,500
Total expenses = $878
Net earnings = $19,622
Hence, rate of return = (19,622 - 8,250) / 8,250
Rate of Return on investment = 137.84%
2. Sold stock for $20 per share:
Total earnings from sale = (500)(20)
= $10,000
Total earnings + dividends = 10,000 + 500
= $10,500
Total expenses = $878
Net earnings = $9,622
Hence, rate of return = (9,622 - 8,250) / 8,250
Rate of Return on investment = 16.66%
3. Cash Purchases:
(i) Sold stock for $40 per share:
Total earnings from sale = (500)(40)
= $20,000
Total earnings + dividends = 20,000 + 500
= $20,500
Total expenses = $15,000
Net earnings = $5,500
Hence, rate of return = 5,500 / 15,000
Rate of Return on investment = 36.67%
(ii) Sold stock for $20 per share:
Total earnings from sale = (500)(20)
= $10,000
Total earnings + dividends = 10,000 + 500
= $10,500
Total expenses = $15,000
Net earnings = ($4,500)
Hence, rate of return = (4,500) / 15,000
Rate of Return on investment = -30%
PART 3
I think lower taxes on dividend and capital gains can enhance economic development. This is because if taxes are low, the individuals are able to save ...Download file to see next pagesRead More