MBAD 6153 – InvestmentsPractice Material

Name _______________________

Complete the following questions/problems. Show all of your work involved to solve problems. (Answer key on last pages…don’t look yet!)

Use the following information for problems 1-3. You have been asked to create a small index of North Carolina Stocks using Cree Research (CREE), Duke Energy (DUK), Bank of America (BAC ), and Goodrich (GR). Your manager asks you to prepare a price-weighted and a market-weighted index for comparison purposes.

Stock Price, t=0 Price, t=1 Shares (million)CREE $30.73 $30.21 89DUK $14.10 $14.08 1287BAC $11.41 $13.25 8357GR $52.18 $48.25 124

1. Calculate the percentage change in value from yesterday (t=0) to today (t=1) using a Price-Weighted Index. SHOW YOUR WORK.

2. Calculate the percentage change in value from yesterday (t=0) to today (t=1) using a Market-Weighted Index. SHOW YOUR WORK.

3. Suppose that after the market closes on t=1, GR does a 2-for-1 (2:1) stock split. Using the Price-Weighted Index approach, calculate the new divisor. SHOW YOUR WORK.

4. Suppose you are in the 15% tax bracket. Would you prefer to earn a 4% taxable return or a 3% tax-free yield? What is the equivalent taxable yield of the 3% tax-free yield? Answer both questions and SHOW YOUR WORK.

5. Short-term unsecured debt issued by large corporations is called _________________ _______________.

6. Allocation of an investment portfolio across broad asset classes is called __________________ ____________________.

7. _______________ ________________ is the conflict of interest between managers and stockholders.

8. A market in which new issues of securities are offered to the public is called ______________ _______________.

9. A __________________ _________________ is a primary offering in which shares are sold directly to a small group of institutional or wealthy investors.

10. Why does it make sense for shelf registration to be limited in time?

Stock Price, t=0 Price, t=1 Shares (million)CREE 30.73 30.21 89DUK 14.1 14.08 1,287.00BAC 11.41 13.25 8357GR 52.18 48.25 124.00

Divisor PriceOld PriceNew Change4 27.105 26.4475 -2.43%

MarketOld MarketNew Change122705.36 137522.9 12.08%

100 87.92429279

Old NewStock Initial Price Final Price Final Price Shares (million) Shares (million)CREE 30.73 30.21 30.21 89 89DUK 14.1 14.08 14.08 1,287.00 1,287.00BAC 11.41 13.25 13.25 8357 8357GR 52.18 48.25 24.125 124.00 248.00

Divisor PriceOld PriceNew ChangeOld 4 27.105 26.4475 -2.43%New 3.087815484

MarketOld MarketNew Change122705.36 137522.9 12.08%

100 87.92429279

1. -2.43%2. 12.08%3. 3.08784. A. 4% taxable equals (4% x (1-15%)) = 3.40% This is better than the 3%

muni yield…therefore accept the taxable.B. The taxable equivalent of 3% at the 15% tax bracket is (3%/(1-15%)) = 3.52% which is less than the 4% taxable yield….Accept the taxable!

5. Commercial paper6. Asset allocation7. Agency problem/theory/conflict8. Primary market9. Private placement10. things change…..elaborate on that theme.