Mary and Nick Stalcheck have an investment portfolio containing four investments. It was developed to provide them with a balance between current income and capital appreciation. Rather than acquire mutual fund shares or diversify within a given class of investments, they developed their portfolio with the idea of diversifying across various asset classes. The portfolio currently contains common stock, industrial bonds, mutual fund shares, and options. They acquired each of these investments during the past three years, and they plan to purchase other investments sometime in the future. Currently, the Stalchecks are interested in measuring the return on their investment and assessing how well they have done relative to the market. They hope that the return earned over the past calendar year is in excess of what they would have earned by investing in a portfolio consisting of the S&P 500 Stock Composite Index. Their research has indicated that the risk-free rate was 7.2% and that the (before-tax) return on the S&P 500 portfolio was 10.1% during the past year. With the aid of a friend, they have been able to estimate the beta of their portfolio, which was 1.20. In their analysis, they have planned to ignore taxes because they feel their earnings have been adequately sheltered. Because they did not make any portfolio transactions during the past year, all of the Stalchecks’ investments have been held more than 12 months, and they would have to consider only unrealized capital gains, if any. To make the necessary calculations, the Stalchecks have gathered the following information on each investment in their portfolio. Common stock. They own 400 shares of KJ Enterprises common stock. KJ is a diversified manufacturer of metal pipe and is known for its unbroken stream of dividends. Over the past few years, it has entered new markets and, as a result, has offered moderate capital appreciation potential. Its share price has risen from $17.25 at the start of the last calendar year to $18.75 at the end of the year. During the year, quarterly cash dividends of $0.20, $0.20, $0.25, and $0.25 were paid. Industrial bonds. The Stalchecks own eight Cal Industries bonds. The bonds have a $1,000 par value, have a 9.250% coupon, and are due in 2027. They are A-rated by Moody’s. The bonds were quoted at 97.000 at the beginning of the year and ended the calendar year at 96.375%. Mutual fund. The Stalchecks hold 500 shares in the Holt Fund, a balanced, no-load mutual fund. The dividend distributions on the fund during the year consisted of $0.60 in investment income and $0.50 in capital gains. The fund’s NAV at the beginning of the calendar year was $19.45, and it ended the year at $20.02. Options. The Stalchecks own 100 options contracts on the stock of a company they follow. The value of these contracts totaled $26,000 at the beginning of the calendar year. At year-end, the total value of the options contracts was $29,000. Questions a. Calculate the holding period return on a before-tax basis for each of these four investments. b. Assuming that the Stalchecks’ ordinary income is currently being taxed at a combined (federal and state) tax rate of 38% and that they would pay a 15% capital gains tax on dividends and capital gains for holding periods longer than 12 months, determine the after-tax HPR for each of their four investments. c. Recognizing that all gains on the Stalchecks’ investments were unrealized, calculate the before-tax portfolio HPR for their four-investment portfolio during the past calendar year. Evaluate this return relative to its current income and capital gain components. d. Use the HPR calculated in question c to compute Jensen’s measure (Jensen’s alpha). Use that measure to analyze the performance of the Stalchecks’ portfolio on a risk-adjusted, market-adjusted basis. Comment on your finding. Is it reasonable to use Jensen’s measure to evaluate a four-investment portfolio? Why or why not? e. On the basis of your analysis in questions a, c, and d, what, if any, recommendations might you offer the Stalchecks relative to the revision of their portfolio? Explain your recommendations.
> Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?
> If you place a stop-loss order to sell at $52 on a stock currently selling for $55.50 per share, what is likely to be the minimum loss you will experience on 100 shares if the stock price rapidly declines to $49.50 per share? Explain. What if you had pla
> What is meant by the holding period, and why is it advisable to use holding periods of equal length when comparing alternative investments? Define holding period return, and explain for what length holding periods it is typically used.
> Define the following terms and explain how they are used to find the risk-free rate of return and the required rate of return for a given investment. a. Real rate of return b. Expected inflation premium c. Risk premium for a given investment
> What is a satisfactory investment? When the present value of benefits exceeds the cost of an investment, what can you conclude about the rate of return earned by the investor relative to the discount rate?
> What role do historical performance data play in estimating an investment’s expected return? Discuss the key factors affecting investment returns—internal characteristics and external forces.
> Describe the steps involved in the investment decision process. Be sure to mention how returns and risks can be evaluated together to determine acceptable investments.
> Differentiate among the three basic risk preferences: risk-indifferent, risk-averse, and risk-seeking. Which of these attitudes toward risk best describes most investors?
> Briefly describe standard deviation as a measure of risk or variability.
> Explain what is meant by the return on an investment. Differentiate between the two components of return—income and capital gains (or losses).
> Describe the basic philosophy and use of stock market averages and indexes. Explain how the behavior of an average or index can be used to classify general market conditions as bull or bear.
> Briefly describe several types of information that are especially well suited to publication on the Internet. What are the differences between the online and print versions, and when would you use each?
> Imagine that you have placed a limit order to buy 100 shares of Herr Mining Co. at a price of $68, although the stock is currently selling for $71. Discuss the consequences, if any, of each of the following situations. a. The stock price drops to $69 per
> The current exchange rate between the U.S. dollar and the Japanese yen is 109 (¥/$). That is, 1 dollar can buy 109 yen. How many dollars would you get for 1,000 Japanese yen?
> How would you access each of the following types of information, and how would the content help you make investment decisions? a. Prospectuses b. Back-office research reports c. Investment letters d. Price quotations
> Briefly describe the types of information that the following resources provide. a. Stockholders’ report b. Comparative data sources c. Standard & Poor’s Corporation d. Mergent e. Value Line Investment Survey
> What popular financial business periodicals would you use to follow the financial news? General news? Business news? Would you prefer to get your news from print sources or online, and why?
> Differentiate between descriptive information and analytical information. How might one logically assess whether the acquisition of investment information or advice is economically justified?
> What are the pros and cons of using the Internet to choose and manage your investments?
> What benefits does an investment club offer the small investor? Would you prefer to join a regular or an online club, and why?
> Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.
> Identify the four main types of online investment tools. How can they help you become a better investor?
> What protection does the Securities Investor Protection Corporation (SIPC) provide for securities investors? How are mediation and arbitration procedures used to settle disputes between investors and their brokers?
> In what two ways, based on the number of shares transacted, do brokers typically charge for executing transactions? How are online transaction fees structured relative to the degree of broker involvement?
> Emma Radcliffe places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $43 per share. Ignoring brokerage commissions, determine how much money Radcliffe will probably have to pay. If
> What is day trading, and why is it risky? How can you avoid problems as an online trader?
> Differentiate between the services and costs associated with full-service, premium discount, and basic discount brokers. Be sure to discuss online transactions.
> Differentiate among market orders, limit orders, and stop-loss orders. What is the rationale for using a stop-loss order rather than a limit order?
> Briefly differentiate among the following types of brokerage accounts: a. Single or joint b. Custodial c. Cash d. Margin e. Wrap
> Describe the types of services offered by brokerage firms, and discuss the criteria for selecting a suitable stockbroker.
> Go to Yahoo! Finance, and look up data on the Vanguard 500 Index Investor fund (ticker symbol VFINX) and the Fidelity Magellan Fund (ticker symbol FMAGX). These are among the largest mutual funds in the United States. Pick one of these funds and click th
> The chart shows the number of global corporate bond issues for which Standard & Poor’s issued ratings upgrades or downgrades every year from 1981 to 2017. a. What is the trend in the number of ratings changes (both upgrades and down
> At the beginning of this chapter, you read about a 2018 earnings announcement from Red Hat in which earnings per share were reported as $0.72 for the quarter. Let’s make a simple assumption and say that earnings for the year were four times as much, or $
> At the beginning of the chapter you read about a couple of analyst reports on Brinker International. Use an online source such as Yahoo! Finance or Brinker’s own website to look up the company’s income statement for the fiscal year ending in June 2018. W
> In this problem we will visit Commercial Vehicle Group (CVGI), which was introduced at the beginning of the chapter. The following table shows the monthly return on CVGI stock and on the S&P 500 stock index from January 2012 to December 2017. Questio
> When a company conducts a stock split, it exchanges new shares for old ones according to some ratio. For example, in March 2018, Herbalife conducted a two-for-one stock split, so after the split each shareholder received two new shares in exchange for ea
> The table below shows the annual return generated by Netflix common stock. Calculate the average annual return and its standard deviation. Compare this to the average return and standard deviation for Target Corporation and American Eagle Outfitters, Inc
> The regular dividend on PG&E preferred stock is $0.3125 per quarter, or $1.25 per year. In December 2017, just before the company suspended dividend payments, the preferred shares were trading at $26.33. What was the dividend yield at that time?
> In the beginning of this chapter you read about open interest on Amazon put options. Suppose in January 2018, put and call options were available on Amazon stock with the following terms: Option Strike Price/Premium Expiration Put $1,200 $195 August 2018
> Dr. Marilyn Davis, a single, 34-year-old heart specialist, is considering the purchase of a small office condo. She wants to add some diversity to her investment portfolio, which now contains only corporate bonds and preferred stocks. In addition, becaus
> Gary Sofer wants to estimate the market value of the Wabash Oaks Apartments, a 12-unit building with six one-bedroom units and six two-bedroom units. The present owner of Wabash Oaks provided Gary with the following annual income statement. Todayâ&
> Hal and Terri Wilson had most of their funds invested in common stock in late 2019. The Wilsons didn’t really do very much investment planning, and they had practically no background or understanding of how income taxes might affect the
> Kathleen “Penni” Kennedy is a young career woman who has built a substantial investment portfolio. Most of her holdings are preferred stocks—a situation she does not want to change. Penni is now considering the purchase of $4,800 worth of LaRamie Corpora
> Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a two-income family. Jim and Polly are both college graduates and hold high paying jobs. Jim has been an avid investor in the stock market for a number
> T. J. Patrick is a young, successful industrial designer in Portland, Oregon, who enjoys the excitement of commodities speculation. T. J. has been dabbling in commodities since he was a teenager—he was introduced to this market by his dad, who is a grain
> A little more than 10 months ago, Luke Weaver, a mortgage banker in Phoenix, bought 300 shares of stock at $40 per share. Since then, the price of the stock has risen to $75 per share. It is now near the end of the year, and the market is starting to wea
> Imagine that you want to create your own stock index to measure the performance of the stock market over time. You decide to use a methodology similar to that used to calculate the DJIA (see Equation 3.1). Your index will contain 10 stocks carefully sele
> Hector Francisco is a successful businessman in Atlanta. The box-manufacturing firm he and his wife, Judy, founded several years ago has prospered. Because he is self-employed, Hector is building his own retirement fund. So far, he has accumulated a subs
> Charles Spurge, a mathematician with Ansco Petroleum Company, wishes to develop a rational basis for timing his portfolio transactions. He currently holds a security portfolio with a market value of nearly $100,000, divided equally between a very conserv
> Calvin Jacobs is a widower who recently retired after a long career with a major Midwestern manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of shop supervisor over 30 years with the firm. Calvin receives Social Security
> The Reverend Mark Thomas is a minister in San Diego. He is married, has one young child, and earns a modest income. Because religious organizations are not notorious for their generous retirement programs, the reverend has decided he should do some inves
> Grace Hesketh is the owner of an extremely successful dress boutique in downtown Chicago. Although high fashion is Grace’s first love, she’s also interested in investments, particularly bonds and other fixed-income securities. She actively manages her ow
> Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They ad
> It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating results of the company issuing the bond. Just as fina
> Max and Veronica Shuman, along with their teenage sons Terry and Thomas, live in Portland, Oregon. Max is a sales rep for a major medical firm, and Veronica is a personnel officer at a local bank. Together they earn an annual income of about $100,000. Ma
> Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in invest
> Imagine that the Mini-Dow Average (MDA) is calculated by adding up the closing prices of five stocks and dividing that sum by a divisor. The divisor used in the calculation of the MDA is currently 0.775. The closing prices for each of the five stocks in
> Brett Daly is an active stock trader and an avid market technician. He got into technical analysis about 10 years ago, and although he now uses the Internet for much of his analytical work, he still enjoys running some of the numbers and doing some of th
> Marc Dodier is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been following one of the hottest issues on Wall Street, C&I Medical Supplies, a company that has turned
> Chris Norton is a young Hollywood writer who is well on his way to television superstardom. After writing several successful television specials, he was recently named the head writer for one of TV’s top-rated sitcoms. Chris fully reali
> Anna Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and operates a highly successful modeling agency. Anna manages her modest but rapidly growing investment portfolio, made up mostly of high-grade common stocks. Because she’s
> Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack
> Wally Wilson is a commercial artist who makes a good living by doing freelance work—mostly layouts and illustrations—for local ad agencies and major institutional clients (such as large department stores). Wally has be
> Sara Thomas is a child psychologist who has built a thriving practice in her hometown of Boise, Idaho. Over the past several years she has been able to accumulate a substantial sum of money. She has worked long and hard to be successful, but she never im
> Susan Lussier is 35 years old and employed as a tax accountant for a major oil and gas exploration company. She earns nearly $135,000 a year from her salary and from participation in the company’s drilling activities. An expert on oil a
> Walt Davies and Shane O’Brien are district managers for Lee, Inc. Over time, as they moved through the firm’s sales organization, they became close friends. Walt, who is 33 years old, currently lives in Princeton, New Jersey. Shane, who is 35, lives in H
> Over the past 10 years, Molly O’Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total market value of $82,500. Molly is at present considering
> Peter Tanaka is interested in starting a stock portfolio. He has heard many financial reporters talk about the Dow Jones Industrial Average as being a proxy for the overall stock market. From visiting various online investment sites, Peter is able to tra
> On January 1, 2020, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $1,100. Because Dave didn’t need this money for his current living expenses, he decided to make a long-term investment. A
> Donald Belson and Laurie Hall, friends who work for a large software company, decided to leave the relative security of their employer and join the staff of Hamelin Pipers, Inc., a two year old company working on new software and hardware solutions for h
> Emily Richards recently graduated from college and will start her new career in two months. She recently learned that her grandfather left her an inheritance of $300,000 worth of stocks and bonds. Rather than spending her newfound wealth, Emily decided t
> Ravi Dumar is a stockbroker who firmly believes that the only way to make money in the market is to follow an aggressive investment posture—for example, to use margin trading. In fact, Ravi has built himself a substantial margin account over the years. H
> Darren Simmons, a financial analyst, considers himself a savvy investor. He has increased his investment portfolio considerably over the past five years. Although he has been fairly conservative with his investments, he now feels more confident in his in
> Susan Bowen, who just turned 55, is employed as an administrative assistant for the Xcon Corporation, where she has worked for the past 20 years. She is in good health, lives alone, and has two grown children. A few months ago her husband died, leaving h
> Joshua Read and Emily Todd, senior accounting majors at a large Midwestern university, have been good friends since high school. Each has already found a job that will begin after graduation. Joshua has accepted a position as an internal auditor in a med
> Jason and Kerri Consalvo, both in their 50s, have $50,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per share and pays dividends of $2 per share per year. No
> During 2018, the Smiths and the Joneses both filed joint tax returns. For the tax year ended December 31, 2018, the Smiths’ taxable income was $130,000, and the Joneses had total taxable income of $65,000. a. Using the federal tax rates given in Table 1.
> Stefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumulate $500,000 over the next 25 years to supplement the retirement programs provided by the federal government and her employer. She expects to earn an average annual r
> You have $5,000 in a 50% margin account. You have been following a stock that you think you want to buy. The stock is priced at $52. You decide that if the stock falls to $50, you would like to buy it. You place a limit order to buy 300 shares at $50. Th
> Bezie Foster has estimated the annual after-tax cash flows and after-tax net proceeds from sale (CFR) of a proposed real estate investment as noted below for the planned four-year ownership period. The initial required investment in the property is $55,0
> Walt Hubble is contemplating selling rental property that originally cost $200,000. He believes that it has appreciated in value at an annual rate of 6% over its four-year holding period. He will have to pay a commission equal to 5% of the sale price to
> In the coming year, the McCormicks expect a rental property investment costing $180,000 to have gross potential rental income of $30,000, vacancy and collection losses equaling 5% of gross income, and operating expenses of $14,000. The mortgage on the pr
> Stan Marsh, an investor, is considering two financing plans for purchasing a parcel of real estate costing $150,000. Alternative 1 involves paying cash; alternative 2 involves obtaining 80% financing at 8% interest. If the parcel of real estate appreciat
> Juan Gonzalez, a single person working for Harla, Inc., will earn $48,000 in 2018 and contribute $7,000 to the firm’s 401(k) plan. If Juan is in the 12% tax bracket, what will his reportable income be? How much tax savings will result, and how much will
> Karen Kline purchased 200 shares of Mex Inc. common stock for $10 per share exactly two years ago, in December 2017. Today, December 15, 2019, the stock is selling for $18 per share. Because Karen strongly believes that the stock is fully valued in the m
> Shawn Healy bought 300 shares of Apple Computer common stock at $132 a share. Fifteen months later, in December, Apple was up to $147 a share and Shawn was considering selling her shares because she believed Apple’s price could drop as low as $142 within
> The Akais just finished calculating their taxable income for their 2018 joint federal income tax return. It totaled $68,750 and showed no tax credits. Just prior to filing their return, the Akais realized that they had treated a $2,000 outlay as an itemi
> Sheila and Jim Smith reported the following income tax items in 2018: Salaries and wages $98,000 Interest on bonds $ 1,100* Unqualified dividends (jointly owned stocks) $ 1,000 Capital gains on securities (all held for more than 18 months) $ 1,500 Deduct
> During the year just ended, Betty Riddle’s taxable income of $148,000 was twice as large as her younger sister Rachel’s taxable income of $74,000. Use the tax rate schedule in Table 17.1 to answer the following questions with regard to the Riddle sisters
> On February 6, 2018, shares of the photo-app company Snap closed at $14.06. That night the company announced better-than-expected earnings results, and the next morning trading in the stock opened at $17.15 and then quickly rose to $21.22 before ending t
> Calculate Ed Robinson’s income tax due on his $335,000 taxable income, assuming that he files as a single taxpayer. After you make the calculation, explain to Ed what his marginal tax rate is and why it is important in making investment decisions.
> Charlene Weaver likes to speculate with preferred stock by trading on movements in market interest rates. Right now, she believes the market is poised for a big drop in rates. Accordingly, she is thinking seriously about investing in a certain preferred
> Sara-J Co. has a preferred stock outstanding that pays annual dividends of $3.50 a share. At what price would this stock be trading if market yields were 7.5%? Use one of the dividend valuation models (from Chapter 8) to price this stock, assuming you ha
> Select one of the preferred stocks listed in Table 16.1—assume the dividends qualify for the preferential tax rate. Using the resources at your campus or public library or on the Internet, determine the following. a. The stock’s latest market price b. It
> Assume that you are evaluating several investments, including the stock of a mature company that pays annual dividends of $2 and is currently trading at $25. Another investment is a trust preferred stock that pays $2.40 in annual dividends and is also tr
> You purchased 100 shares of a $3 preferred stock one year and one day ago for $25.50 per share. You sold the stock today for $29.25 per share. Assuming your ordinary income tax rate is 24% and the tax rate on capital gains and qualified dividends is 15%,
> The InvestCo Company has 400,000 shares of $3 trust preferred stock outstanding. The firm generates an EBIT of $35 million and has annual interest payments of $1.75 million. Given this information, determine the fixed charge coverage on these trust prefe
> The InvestCo Company has 400,000 shares of $3 preferred stock outstanding. It generates an EBIT of $35 million and has annual interest payments of $1.75 million. Given this information, determine the fixed charge coverage of the preferred stock—assume th
> An adjustable-rate preferred share is currently selling at a dividend yield of 9%. Assume that the dividend rate on the stock is adjusted once a year and that it is currently paying an annual dividend of $5.40 a share. Because of major changes that have
> A wealthy investor holds $500,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 105% of par. The investor is concerned, however, that rates are headed up over the next six months, and he would like to do something to protect thi
