Chapter 2.3-2.4

Question 1

Equity Securities

Answer 1

1. Common Stock- Ownership
2. Preferred Stock- Perpetuity
3. American Depository Receipts

Question 2

Characteristics of Common Stock- Ownership

Answer 2

Residual claim- Last in line for claims on assets and income of the corporation.

Limited liability- Can only lose what was invested

Question 3

Characteristics of Preferred Stock- Perpetuity

Answer 3

Fixed dividends- promises to pay to its holder a fixed amount of income each year.

Priority over common- It has priority over common stock holders: claims on assets and dividends are usually cumulative.

Tax treatment- Not tax deductible to the firm paying out dividends but a Corporation may exclude 70% of dividends received from domestic Corps in computation of their taxable income.

Question 4

Characteristics of American Depository Receipts

Answer 4

Certificates traded in U.S. markets that represent ownership in shares of a foreign company.

Each ADR may correspond to ownership of a fraction of a foreign share, one share, or several shares of a corporation.

Question 5

Stock Market Indexes

Answer 5

1. Dow Jones (DJIA)

2. Standard & Poor 500 (S&P 500)

Question 6

Investors can base their portfolios on an index

Answer 6

1. Buy an index mutual fund

2. Buy exchange traded funds (ETFs)

Question 7

Dow Jones Industrial Average

Answer 7

• Includes 30 large blue-chip corporations

- Price-weighted average

Question 8

Price-weighted average Example

Answer 8

Stock ABC: Starts at 25; Ends at 30
Stock XYZ: Starts at 100; Ends at 90

Portfolio: Initial Value= 25+100 = 125
                 Final Value= 30+90= 120
                   % change = -5/125 = -.4%
Index: 100+25/2=62.50
           30+90/2= 60 
            % change= -2.5/62.5 = -4%

Question 9

Standard & Poor Indexes 500: Improvement over the Dow Jones in 2 ways

Answer 9

1. More Broadly based index of 500 firms

2. It is a Market-value-weighted index

Question 10

Market-value-weighted index Example

Answer 10

Final Outstanding Value of all Outstanding Stock was 690 million.

(690/600)* 100 = 115; thus a 15% return
***Value weighted index gives more weight to ABC