Question

1) indicate which 9 of the following 18 statements are false.

		If 1 million shares of Potomac Optical stock were bought by a variety of investors yesterday for $25 per share and if Potomac Optical received $25 million from the sale of these stock shares, then the 1 million shares were more likely sold on the primary market than the secondary market.
		Yesterday, the amount of stock trading activity on the primary market was greater than the amount of stock trading activity on the secondary market.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the bondholders of Sno-Glo make up the primary group of investors that runs the company.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the common shareholders of Sno-Glo make up the primary group of investors that runs the company.
		Yesterday, the amount of trading activity on the stock market involving preferred stock was greater than the amount of trading activity on the stock market involving common stock.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the preferred shareholders of Sno-Glo make up the primary group of investors that runs the company.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the common stock of Sno-Glo is most likely to be the riskiest of the securities issued by the company.
		When a company performs very well, the dividends paid to its preferred shareholders are frequently raised.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the preferred stock of Sno-Glo is most likely to be the riskiest of the securities issued by the company.
		When a company performs very poorly, the dividends paid to its common shareholders may be reduced.
		If 1 million shares of Potomac Optical stock were bought by a variety of investors yesterday for $25 per share and if Potomac Optical received $0 from the sale of these stock shares, then the 1 million shares were more likely sold on the secondary market than the primary market.
		If 1 million shares of Potomac Optical stock were bought by a variety of investors yesterday for $25 per share and if Potomac Optical received $25 million from the sale of these stock shares, then the 1 million shares were more likely sold on the secondary market than the primary market.
		When a company performs very poorly, the dividends paid to its preferred shareholders may be reduced.
		Yesterday, the amount of stock trading activity on the secondary market was greater than the amount of stock trading activity on the primary market.
		If 1 million shares of Potomac Optical stock were bought by a variety of investors yesterday for $25 per share and if Potomac Optical received $0 from the sale of these stock shares, then the 1 million shares were more likely sold on the primary market than the secondary market.
		When a company performs very well, the dividends paid to its common shareholders are frequently raised.
		If Sno-Glo has issued bonds, common stock, and preferred stock, then the bonds of Sno-Glo are most likely to be the riskiest of the securities issued by the company.
		Yesterday, the amount of trading activity on the stock market involving common stock was greater than the amount of trading activity on the stock market involving preferred stock.

4) Today, you sold 1 share of Litchfield Design stock. The percentage return over the past quarter (from 3 months ago to today) for these shares was 6.29 percent. You purchased the shares 3 months ago at a price of 118.69 dollars per share. You just received 4.57 dollars in dividends. What was the price of the stock when you sold it?

6) Blue Eagle Recycling stock has an expected annual return of 15.81 percent. The stock is currently priced at 62.97 dollars per share and has an expected dividend yield of 7.76 percent. What is the price of the stock expected to be in 1 year?

10) Platinum Water Shipping stock is expected to pay a dividend of 3.92 dollars in 1 year and a dividend of 3.6 dollars in 2 years. The stock is expected to be priced at 84.69 dollars in 1 year and at 90.84 dollars in 2 years. What is the current price of Platinum Water Shipping stock? The stock’s dividend is paid annually and the next dividend is expected in 1 year.

Question 11

Fairfax Paint stock is expected to pay a dividend of 3.62 dollars in 1 year and a dividend of 2.44 dollars in 2 years. The stock is currently priced at 92.29 dollars and is expected to be priced at 99.32 dollars in 1 year. What is the price of Fairfax Paint stock expected to be in 2 years? The stock’s dividend is paid annually and the next dividend is expected in 1 year.

Question 12

Orange Valley Technology stock is expected to pay a dividend of 3.8 dollars in 1 year. The stock is currently priced at 124.99 dollars, is expected to be priced at 129.57 dollars in 1 year, and is expected to be priced at 135.13 dollars in 2 years. What is the dividend in 2 years expected to be for Orange Valley Technology stock? The stock’s dividend is paid annually and the next dividend is expected in 1 year.

Answer 1

Statement 1 is True

When a company issues its shares in primary market, the money raised is received by the company while the secondary market is where investors buy and sell securities they already own, thus the company gets no money from transactions in the secondary market.

In this case, the company received money, so the shares were sold on the primary market.

Statement 2 is False

The amount of stock trading activity on the primary market cannot be greater than the amount of stock trading activity on the secondary market as the majority of stock trading activity takes place on the secondary market. Statement 3 is False Common stock holders are considered as the owners of the company who runs the company through the board of directors that they elect. Bond holders and preferred stock holders have limited influence over the company. Statement 4 is True Common stock holders are considered as the owners of the company who runs the company through the board of directors that they elect, thus the common shareholders of Sno-Glo make up the primary group of investors that runs the company. Statement 5 is False Preferred stock is traded rarely on the stock market especially as compared to common stock and thus makes up relatively little of the trading activity on the stock market. Statement 6 is False Common stock holders are considered as the owners of the company who runs the company through the board of directors that they elect. Bond holders and preferred stock holders have limited influence over the company. Statement 7 is True When profits are distributed, the common stock are paid in the last with the remaining profits and thus, is most likely to be the riskiest of the securities issued by the company. Statement 8 is False The dividend payable to preferred shareholders is decided when preference stocks are sold to investors and do not change as per company’s performance. They are typically paid a fixed amount of dividend every year. Thus, even when a company performs very well, the dividends paid to its preferred shareholders are not raised. Statement 9 is False When profits are distributed, the common stock are paid in the last with the remaining profits and thus, is most likely to be the riskiest of the securities issued by the company. For a company, its common stock is most likely to be the riskiest, its bonds are most likely to be the least risky, and its preferred stock is most likely to be in the middle. Statement 10 is True Dividend paid to common stock holders do change over time to reflect company performance, they may be reduced when the firm does poorly. Statement 11 is True When a company issues its shares in primary market, the money raised is received by the company while the secondary market is where investors buy and sell securities they already own, thus the company gets no money from transactions in the secondary market. In this case, the company did not receive any money, so the shares were sold on the secondary market. Statement 12 is False When a company issues its shares in primary market, the money raised is received by the company while the secondary market is where investors buy and sell securities they already own, thus the company gets no money from transactions in the secondary market. In this case, the company received money, so the shares were sold on the primary market and not secondary market. Statement 13 is True Although dividends paid to preferred shareholders is fixed and do not frequently change over time to reflect company performance, they may be reduced when the firm does poorly. Statement 14 is True The amount of stock trading activity on the secondary market is usually greater than the amount of stock trading activity on the primary market as the majority of stock trading activity takes place on the secondary market. Statement 15 is False When a company issues its shares in primary market, the money raised is received by the company while the secondary market is where investors buy and sell securities they already own, thus the company gets no money from transactions in the secondary market. In this case, the company did not receive any money, so the shares were sold on the secondary market and not primary market. Statement 16 is True Common stock holders are considered as the owners of the company. Dividend paid to common stock holder’s change over time to reflect company performance, they may be raised when the firm performs well. Statement 17 is False When profits are distributed, the bond shareholders are paid in preference as compared to preference stock holders and common stock holders. and thus, is less likely to be at risk. For a company, its common stock is most likely to be the riskiest, its bonds are most likely to be the least risky, and its preferred stock is most likely to be in the middle. Statement 18 is True Common stock is traded more on the stock market as compared to preferred stock and thus makes up contributes relatively more of the trading activity on the stock market. Answer 4) Percentage return = total dollar return ÷ initial value Total dollar return = cash flow from investment + capital gain Capital gain = ending value – initial value Initial value = $118.69 per share Cash flow from investment = dividends = $4.57 Percentage return = 6.29% Percentage return over the past quarter = (cash flow from investment + capital gain) ÷ initial value = (cash flow from investment + ending price – initial price) ÷ initial value      0.0629 = ($4.57 + ending price – $118.69) / $118.69      0.0629 × $118.69 = $4.57 + ending price – $118.69      $7.46 – $4.57 + $118.69 = ending price     = $121.58