PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 11, Problem 3RQ
To determine
Determine whether stocks are a good financial investment for a risk-averse person.
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You are a financial planner. One of your clients is 40 years old and wants to begin saving for retirement. You advise her to put $5,000 a year into the stock market. You estimate that the market's effective return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year. What is the value of her savings after 20 years.You are a financial planner. One of your clients is 40 years old and wants to begin saving for retirement. You advise her to put $5,000 a year into the stock market. You estimate that the market's effective return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year. What is the value of her savings after 20 years.
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Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $54,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $64,800 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $129,600 of other capital gains (taxed at 15 percent)
Required: What is the tax savings from the special tax treatment?
Suppose that the return from holding a particular firm’s stock goes from 15% in one year to 18% in the following year. The majority shareholder claims that “the stock return only increased by 3%,” while the chief executive officer claims that “the return on the firm’s stock increased by 20%.” Reconcile their disagreement.
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- Chapter 6 Templates Page 184 The following figure shows plots of monthly rates of return and the stock market for two stocks. (LO 6-5) a. Which stock is riskier to an investor currently holding a diversified portfolio of common stock? b. Which stock is riskier to an undiversified investor who puts all of his funds in only one of these stocks? Templates and spreadsheets are available in Connect mheducation.com/parser php?secload36.f&fake&printarrow_forwardSuppose you expect a stock to pay a dividend of $10 every year forever and the discount rate is fixed at 5%. What would expect the price of that stock to be? What happens to the price of the stock if the discount rate falls to 2%? (Note: this exercise might help explain why the stock market is so high these days, despite the COVID-19 pandemic and lackluster economy.)arrow_forwardOn the golf course, John was playing near a group of four golfers. One of the four golfers was a director of Company ABC. The director was telling the three other golfers in his group that his company made much higher profits in the past year than in the previous year. When John went back to the office after the golf game, he checked with his broker regarding the stock and found that, two weeks earlier, the company had made an announcement similar to what the director had told his friends. John went ahead to buy the stock and was very pleased that the stock earned him abnormal returns over the next month. (i) Discuss the type of information that John heard on the golf course. Appraise which one (1) of the three forms of market efficiency is most relevant to this situation. (ii) Analyse and discuss whether the above situation describes a violation of the efficient markets hypothesis.arrow_forward
- Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $115 and that of AGG is $96. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 5%, what is the expected return for your retirement portfolio?arrow_forwardYou are considering a purchase of UnderDog Inc.’s stock, currently available on the NYSE for $105 a share. You have calculated that for this investment the required rate of return is 11.3% and the past dividends were growing in accordance with the GDP growth. The economy is expected to grow 2.0% in the foreseeable future. The latest dividend was $10 per share. 2) What if the GDP growth suddenly increased to 3%?arrow_forwardQuestions: Compute the expected intrinsic price of each stock in year 5. Assume that All stocks are fairly priced such that the intrinsic and market values are equal. Dividends are paid at the beginning of the year How many units of each stock will Stephanie buy? Support your response with relevant computations. What will be the total investment cost for shares? Show appropriate calculations. Which bonds are acceptable for investment? Justify your response with suitable computations. What will be the total cost of investment in bonds? Do the stock and bond investments fall within Stephanie’s investment guidelines? Show appropriate computations in support of your response. Will Stephanie have enough funds for her investment in stocks and bonds, when needed? What will be the surplus / shortfall, if any? Given that Stephanie’s bank offers an interest rate of 6% per year, what additional amount should she have deposited as a fixed…arrow_forward
- Question 3 Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. Now, suppose you have decided to sell one of the stocks in your portfolio with a beta equal to 1.0 for 7,500 and to use these proceeds to buy another stocks for your portfolio. Assume the new stock's beta to 1.75. Calculate your portfolio's new beta.arrow_forwardAssume that the risk-free rate of interest is 4% and the expected rate of return on the market is 16%. A share of stock sells for $63 today. It will pay a dividend of $3 per share at the end of the year. Its beta is 1.1. What do investors expect the stock to sell for at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardQuestion 6 Suppose you are interested in buying a one-year 1,000 dirham bond. You have two options available in the bond market: Option 1 - Emirates Airline bond that pays a coupon rate of 4.75% per year paid annually. Option 2 - Emaar bond that pays a coupon rate of 6.0% per year paid annually. If you decide to buy the Emirates Airline bond, which of the prices below will give you a return approximately equal to the Emaar bond? O a. 956.9 dirhams Ob.973.2 dirhams O. 995.2 dirhams Od. 988.2 dirhamsarrow_forward
- You are the Financial Manager of Walmart in U.S. and Walmart has recently started exporting food products to an Australian company, Woolworths. The exports are currently invoiced in Australian dollars (AUD). What risk does Walmart face if it chooses not to hedge its sales? The risk that the AUD may increase relative to USD which would decrease the amount Walmart would receive from Woolworths The risk that the AUD may increase relative to USD which would increase the amount Walmart would receive from Woolworths The risk that the AUD may decrease relative to USD which would increase the amount Walmart would receive from Woolworths The risk that the AUD may decrease relative to USD which would decrease the amount Walmart would receive from Woolworthsarrow_forwardLet $P1 be the price you were supposed to find in the previous question, and assume that you observe that the option is selling for a different price, $P2. Which of the following MUST be true? If P1>P2, then you can make an arbitrage, and your arbitrage strategy, among other things, will include borrowing money and selling the stock If P1P2, then you can make an arbitrage, and your arbitrage strategy, among other things, will include short-selling the stock and investing money If P1arrow_forwardConsider a certain butterfly spread on IBM: this is a portfolio that is long one call at $250, long one call at $270, and short 2 calls at $260. Assume expiration of all options is at the same time $T=2$. If today the calls cost $10.00, $5.00, and $1.00 for the strikes at 250, 260, and 270, respectively, what will be the profit or loss from buying this spread if the stock turns out to be trading at $255 at time $T$? Assume the risk-free rate is 5%. Select one: a. 3.28 b. 3.01 c. 4.09 d. 3.89arrow_forwardarrow_back_iosSEE MORE QUESTIONSarrow_forward_ios
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