finance chapter 7

finance chapter 7 - Chapter 7, Solutions CHAPTER 7 Valuing...

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Chapter 7, Solutions CHAPTER 7 – Valuing Stocks Questions LG1 1. As owners, what rights and advantages do shareholders obtain? They are able to participate in the economic growth of publicly traded firms without having to manage business entities directly. They have the right to residual cash flows of corporate profits and often receive some of these cash flows through dividends. In addition, shareholders vote on the members for board of directors and other proposals for the company. Shareholder capital losses are capped in that they can only lose their initial investment. Stocks are very liquid and investors can enjoy this liquidity in both their entrance into the stock market and their exit from it. LG1 2. Describe how being a residual claimant can be very valuable. Residual claimant’s are able to delegate the operations of the firm to professional managers, enjoying the possibly vast gains in value that can be created by some firms over time. LG2 3. Obtain a current quote of McDonald’s (MCD) from the Internet. Describe what has changed since the quote in Figure 8.1. As of November 23, 2007, MCD’s stock price had increased in value to $57.72 per share. MCD experienced a modest loss from July 11, 2007 reaching a trough in mid-August 2007 at approximately $47.50 per share. Since that time, it has generally trended upward through the Fall of 2007. LG2 4. Get the trading statistics for the three main U.S. stock exchanges. Compare the trading activity to that of Table 8.1. The table below reflects trading activity on the three main U.S. stock exchanges for November 26, 2007. Trading volume was particularly high this day compared to the July 11, 2007 activity reflected in Table 8.1. Continued concerns over the home mortgage crises built into a selling frenzy in the markets with the DJIA plummeting 240 points on this day. Volume was also up due to this trading day immediately following the Thanksgiving holiday weekend, since markets were closed the previous Thursday and only light trading volume was experienced in the lightly attended trading session the day after Thanksgiving. 7-1
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Chapter 7, Solutions NYSE AMEX NASDAQ Advancing Issues 834 (24%) 451 (33%) 782 (25%) Declining Issues 2,565 (74%) 824 (60%) 2,248 (72%) Unchanged Issues 64 (2%) 96 (7%) 104 (3%) Total Issues 3,463 1,371 3,134 New Highs 45 48 54 New Lows 340 128 286 Up Volume 463,831,873 (13%) 102,173,146 (13%) 339,948,056 (17%) Down Volume 3,149,651,823 (86%) 667,962,524 (86%) 1,599,678,727 (82%) Unchanged Volume 38,646,084 (1%) 8,138,296 (1%) 8,948,642 (0%) Total Volume 3,652,129,780 1 778,273,966 1 1,948,575,425 1 LG3 5. Why might the Standard & Poor’s 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than The S&P 500 is a broad market index that includes stocks of the 500 largest US firms
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finance chapter 7 - Chapter 7, Solutions CHAPTER 7 Valuing...

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