Question

2 Why do most professionals consider the Wilshire 5000 a better index of the performance of...

2
Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average? ( LO 2- 2)

7. What is meant by the LIBOR rate? The Federal funds rate? ( LO 2- 1)

9. Why are corporations more apt to hold preferred stock than are other potential investors? (LO 2-1)

13. A municipal bond carries a coupon rate of 6 ¾ % and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket? ( LO 2- 1)

14. Suppose that short- term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after- tax yield if your tax bracket is: ( LO 2- 1)

a. Zero

b. 10%

c. 20%

d. 30%

19. Consider the three stocks in the following table. Pt represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two- for- one in the last period. ( LO 2- 2)

P0

Q0

P1

Q1

P2

Q2

A

90

100

95

100

95

100

B

50

200

45

200

45

200

C

100

200

110

200

55

400

a. Calculate the rate of return on a price- weighted index of the three stocks for the first period ( t = 0 to t = 1).

b. What must happen to the divisor for the price- weighted index in year 2?

c. Calculate the rate of return of the price- weighted index for the second period ( t= 1 to t=2)

20. Using the data in the previous problem, calculate the first- period rates of return on the following indexes of the three stocks: ( LO 2- 2)

a. A market value– weighted index

b. An equally weighted index

32. Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (LO 2-1)

CFA Problems
1. Preferred stock yields often are lower than yields on bonds of the same quality because of: ( LO 2- 1)

a. Marketability

b. Risk

c. Taxation

d. Call protection

Homework Answers

Answer #1

2) Wilshire is better because it has 5000 stocks which covers more than 95% of the amrket where as DJIA has only 30 stock which also covers major market but not as much as Wilshire 5000

7) LIBOR is the rate that banks charge to lend to each other. Since the risk is less, it can be used as risk free rate too. The federal funds rate is the rate at which Fed lends to other banks. It can also be used as proxy for risk free rate

9) Corporations may need steady cash flow and therefore need to hold preferred stock. Investors on the other may or may not need so. Corporateions can also dictate terms if they have a high share holding.

13) Yield on muni bond= Yield /(1-tax rate)
=6.75/0.65=10.38%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 97 100 102 100 102 100 B 57 200 52 200 52 200 C 114 200 124 200 62 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t...
Consider the three stocks in the following table. P(t) represents price at time t, and Q(t)...
Consider the three stocks in the following table. P(t) represents price at time t, and Q(t) represents shares outstanding at time t. Stock C splits two-for-one in the last period. a.) What is the new divisor for the price-weighted index that is formed using Stocks A, B, and C if the starting divisor is 3? b.)What is the rate of return for the price-weighted index that is formed using Stocks A, B, and C from time period 1 to time...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 93 100 98 100 98 100 B 53 200 48 200 48 200 C 106 200 116 200 58 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 86 100 91 100 91 100 B 46 200 41 200 41 200 C 92 200 102 200 51 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2   A 99       100       104       100       104       100         B 59       200       54       200       54       200         C 118       200       128       200       64       400       a. Calculate the rate of...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round answers to 2...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2   A 95       100       100       100       100       100         B 55       200       50       200       50       200         C 110       200       120       200       60       400       Calculate the first-period rates of...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 100 100 105 100 105 100 B 60 200 55 200 55 200 C 120 200 130 200 65 400 Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round your answers to...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2   A 88       100       93       100       93       100         B 48       200       43       200       43       200         C 96       200       106       200       53       400       Calculate the first-period rates of...
Consider the three stocks in the following table. Pt represents price at time t, and Qt...
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2   A 92       100       97       100       97       100         B 52       200       47       200       47       200         C 104       200       114       200       57       400       Calculate the first-period rates of...