Investment Fundamentals

Short question 1
What is specialized mutual fund?
A mutual fund investing primarily in the securities of a particular industry, sector,
type of security or geographic region. Because of the lack of diversification,
specialized funds are higher risk but potentially higher reward than most
other types of mutual funds. also called specialty fund.

Short question 2

Contrast the features of common and preferred stock?

Preferred Stocks
Preferred stock is a hybrid form of financing, combining feature of debt and
common stock.
Like bonds, preferred stock has a par value and a dividend, that must be
paid before dividends can be paid on the common stock.
However, if the preferred dividend is not earned, the directors can omit it
without throwing the company into bankruptcy.
Common Stock
Securities that represent the ultimate ownership (and risk) position in a
corporation.
In event of liquidation, these stockholders have a residual claim over the
assets.
Their claim is limited to amount recovered from the asset of the company.
Common stocks has no maturity date.
 Short question 3

Differentiate between return and capital gain?

Return
The sum of income plus capital gains earned on an investment in an asset.
Returns depends upon
nature of the investment
the maturity period
host of other factors
capital gain
An increase in the value of a capital asset, such as a stock. Speculator achieve
profits through price changes.
Short question 4
Contrast Cash and Margin Accounts?
An investor using a cash account is not allowed to borrow funds from his
or her broker-dealer in order to pay for transactions in the account.
A margin account is a type of brokerage account in which the broker-
dealer lends the investor cash, using the account as collateral, to
purchase securities.
Short question 5

You sell a stock short for 50 and repurchase it for 30. What is
percentage return?
The gain is 20.
The percentage return is
20 / 50 * 100 = 40%
 Long Question 1
A 40-year-old individual establishes a retirement account that is expected to
earn 7 percent annually. Contributions will be $2,000 annually at the
beginning of each year. Initially, the saver expects to start drawing on the
account at age 60.
a) How much will be in the account when the saver is age 60?
b) If this investor found a riskier investment that offered 10 percent, how
much in additional funds would be earned?

A)

PV of Annuity = 2,000 x [1-(1.07)-20] / 0.07

PV of Annuity = 21188.02

FV = 21188.02 x (1.07)20
FV = 81990.9847

B)
If the interest rate is 10% then additional fund would be earn

FV = 21188.02 x (1.1)20
FV = 142542.403
then additional fund would be earn
= 142542.403 81990.9847
= 60551.4183
 Long Question 2

A) An investor buys shares in a mutual fund for $20 per share. At

the end of the year the fund distributes a dividend of $0.58,
and after the distribution the net asset value of a share is
$23.41. What would be the investors percentage return on the
investment?
The return on investment:
ROI = (Final investment value - Initial investment value) / Initial investment
value
ROI = (23.41 + 0.58 - 20.00) / 20.00
ROI = (23.99 - 20.00) / 20.00
ROI = 3.99 / $20.00 = .1995 or 19.95%

B) If a firm has sales of $42,791,000 a year, and the average

collection period for the industry is 40 days, what should be this firms
accounts receivable if the firm is comparable to the industry?

Solution:

Average collection period = Receivable / sale per day

Receivable = Average collection period * Sale per day
Receivable = 40 * 42791000 / 365
Receivable = 40 * 117235.616
Receivable = 4689424.64
 Long Question 3

A) The annual risk-free rate of return is 2 percent and the

investor believes that the market will rise annually at 7
percent. If a stock has a beta coefficient of 1.5 and its current
dividend is $1, what should be the value of the stock if its
earnings and dividends are growing annually at 4 percent?
Solution:
Required rate of return on stock
Required rate of return on stock = .02 +(1.5*(.07 -
.02))
Required rate of return on stock = .02 +(1.5*.05)
Required rate of return on stock = .02 +.075
Required rate of return on stock = .095, or 9.5
percent

the stock price

Using the Gordon Dividend Growth Model, we find

that:

Current stock price = (Current Dividend*(1+growth

rate))/(Required rate of return - growth rate)

Current stock price = (1*(1+.04))/(.095 - .04)

Current stock price = (1*1.04)/.055
Current stock price = 1.04/.055
Current stock price = 18.91
B)

Preemtive Right
A preemptive right is a privilege that may be extended to certain
shareholders of a corporation that grants them the right to purchase
additional shares in the company prior to shares being made
available for purchase by the general public in the event of a
seasoned offering, which is a secondary issuing of stock.
Cumulative voting
Cumulative voting is a type of voting system that helps strengthen the
ability of minority shareholders to elect a director. This method allows
shareholders to cast all of their votes for a single nominee for the
board of directors when the company has multiple openings on its
board.
The board of directors'
The board of directors' key purpose is to ensure the
company's prosperity by collectively directing the company's
affairs, whilst meeting the appropriate interests of its
shareholders and stakeholders.