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Q13_CH3

# Q13_CH3 - ECON 133 Summer 2009 Sample Quiz 3 August 17 Name...

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ECON 133 Summer 2009 Sample Quiz 3 : August 17 Name: ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° SID: ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° Score: ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° 1. Stocks° Which of the following statements regarding corporate stocks is NOT correct? (a) If capital gain is taxed at a higher rate than dividends, companies should not pay out any divi- dends, according to the MM theory. (b) Stock options issued to executives dilute the ownership of ordinary shareholders. (c) Companies can repurchase outstanding shares as a way to return investments back to shareholders. (d) If price is less a concern than the execution speed, investors should place a market order, instead of a limit order. ANS: (a) 2. Margin Trading° Dee Trader opens a brokerage account, and purchases 300 shares of Internet Dreams at \$40 per share. She borrows \$4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. (a) What is the margin in Dee±s account when she ²rst purchases the stock? ANS: 300 ° 40 ± 4000 = \$8 ; 000 : (b) If the share price falls to \$30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call? ANS: Asset Liability/Equity 300 ° 30 = 9000 (stock value) 4000 ° (1 + 8%) = 4320 (money owed plus interest) 9000 ± 4320 = 4680 (equity) Margin = Equity Value of Stock = 4680 9000 = 52% : She will not get a margin call. (c) What is the rate of return on her investment? ANS: 4680 ° 8000 8000 = ± 41 : 5% : 3. Short Sale° Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from \$40 to \$50, and the stock has paid a dividend of \$2 per share.

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Q13_CH3 - ECON 133 Summer 2009 Sample Quiz 3 August 17 Name...

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