A primary market and capital market transaction

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1. ABC Inc., which has been a publicly traded company since 1900, just issued new common shares to the general public. If you purchased a portion of these shares, you would have participated in both a primary market and capital market transaction.

TRUE or FALSE

2. The majority of the total dollar volume of common shares traded in the U.S. occurs in the over the counter market.

TRUE or FALSE

3. Stock market brokers earn their profits via the bid/ask spread.

TRUE or FALSE

4. Combining foreign and domestic investments in a portfolio can provide potential benefits from changes in currency value.

TRUE or FALSE

5. A Canadian investment banker bought 45,000 shares of PQU stock, which has cash flows demoninated in British pounds. At the time of purchase, PQU was selling for £50 and the exchange rate was C$1.25/£. Find the banker's rate of return (in terms of Canadian dollars) if PQU trades for £60 and the exchange rate is C$1.33/£ when the position is closed.
A. -.0602
B. -.2768
C. .0602
D. .2768

6. You decide to invest in an Australian stock with cash flows demoninated in Australian dollars. At the time of purchase, the stock traded at A$80/share and the exchange rate was A$1.6/US$. Find your rate of return (in US dollars) if the stock trades for A$100 and the exchange rate is A$1.43/US$ when you close your position. Round intermediate steps to two decimals and your final answer to four decimals.
A. -.3047
B. .3986
C. .3047
D. -.3986

7. XYZ went public five years ago, but they wish to issue new stock to help finance a project. This transaction will occur in which one of the following markets?
A. Primary
B. Secondary
C. Money
D. All of the above

8. Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):
A. Supplemental offering
B. Seasoned equity offering
C. Initial Public offering
D. after-market underwriting

9. The document that must be prepared in order to receive approval for a stock offering is called a
A. tombstone

B. prospectus

C. regulatory report

D. none of the above

10. You purchased $10,000 worth of stock in a German corporation when the exchange rate was $1.00 = 1.2 euros and the share price was 50 euros. During the time you held the stock, you received a dividend of 3 euros per share, which you convert back to dollars at a rate of $1.00 = 1.25 euros. After six months, you sold all your stock when the exchange rate was $1.00 = 1.25 euros and the share price was 45 euros. How much did you make (or lose) in terms of dollars on your investment?
a. -$1360

B. -$845
C. -$784
D. None of the above

11. Insider trading involves the use of nonpublic information about a security to gain an edge on other, less informed investors.

TRUE OR FALSE

12. Designated market makers manage the auction process in broker markets.

TRUE OR FALSE

13. Secondary markets provide a means for the issuing corporation to raise funds.

TRUE OR FALSE

14. Use the following information to answer the next three questions.

On 1/20, you shorted 1500 shares of Zeta stock on 65% margin. Zeta was trading at $50 at the time you opened your position. Your broker charged you annual rate of 6% on the loan and the maintenance margin is 40%.

Find your margin on 1/21 if Zeta trades for $52.5
A. .3333
B. .5238
C. .2857
D. .5714

What is the critical price on your short sale? Round your final answer to two decimals.
A. 42.42
B. 137.5
C. 58.93
D. 48.21

You closed your margin account six months later when Zeta traded at $54/share. What is your return on invested capital?
A. -.1531
B. -.1392
C. .1069
D. .0931

15. A margin call will occur whenever the an investor's margin account falls below the initial margin level.

True or False

16. Jim purchased 100 shares of stock at a price of $32 a share. He utilized his 80% margin account to make the purchase. The maintenance margin is 40%. What is Jim's initial equity in this investment?
A. 640
B. 2560
C. 1280
D. 1920

17. Margin accounts tend to magnify gains and losses as compared to cash accounts.

True or False

18. Use the following information to answer the next two questions.

Megan bought 200 shares of stock at a price of $10 a share on 55% margin. Her broker charged a 5% annual interest rate on the margin loan and her maintenance margin is 30%. Megan sold her stock after a year for $12 a share. What is Megan's return on invested capital?
A. .1775
B. .3136
C. .2643
D. .3227

What is the lowest price the stock can trade at before Megan receives a margin call?
A. 3.46
B. 7.86
C. 6.43
D. 4.29

19. Carson Corporation stock sells for $50 per share, and you've decided to purchase as many shares as you possibly can. You have $50,000 of your own funds to invest. What is the maximum number of shares you can buy if the initial margin is 40 percent? Round to the nearest whole share.
A. 1667
B. 2500
C. 2098
D. 1000

20. Use the following to answer the next three questions

The stock of Flop Industries is trading at $45. You feel the stock price will decline, so you short 600 shares at an initial margin of 75 percent. The maintenance margin is 45 percent and your broker charges a 5% annual rate on borrowed funds.

Find your total deposit with your broker.
A. 27000
B. 63000
C. 33750
D. None of the above

Will you receive a margin call if the stock climbs to $55 the day after you open your position?

Yes or No

21. Find your return on invested capital if you close your position after 9 months and the stock is trading at $48.5.
A. -.1412
B.-.1162
C. .0912
D.-.1187

Reference no: EM13833898

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