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    Answer and Explanation

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    John Tom
    The SEC requires companies issuing new securities to provide relevant financial information to potential investors in order to protect them. However, the real value of a security is determined by market forces, not opinions from the SEC or analysts. The market will establish the value regardless of other opinions.

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    Answer and Explanation

    Uploaded by

    John Tom
    17 views2 pages
    The SEC requires companies issuing new securities to provide relevant financial information to potential investors in order to protect them. However, the real value of a security is determined by market forces, not opinions from the SEC or analysts. The market will establish the value regardless of other opinions.

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    lecture note

    Original Title

    ACC721 Lecture 2 2019

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    The SEC requires companies issuing new securities to provide relevant financial information to potential investors in order to protect them. However, the real value of a security is determined by market forces, not opinions from the SEC or analysts. The market will establish the value regardless of other opinions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views2 pages

    Answer and Explanation

    Uploaded by

    John Tom
    The SEC requires companies issuing new securities to provide relevant financial information to potential investors in order to protect them. However, the real value of a security is determined by market forces, not opinions from the SEC or analysts. The market will establish the value regardless of other opinions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    The SEC attempt to protect investors who are purchasing newly issued securities by requiring issuers to

    provide relevant financial information to prospective investors.

    Question 4.-

    No, the real value of a security is determined by the equilibrium forces of an efficient market.
    Assuming that the information provided on newly issued securities is accurate, the market will
    establish the value of a security regardless of the opinions rendered by the SEC, or, for that
    matter, opinions offered by any advisory service or analyst.

    Question -8

    Bonds provide a stream of fixed nominal payments over its life. Investment in
    bonds nevertheless involves risks, including inflation risks, maturity risks,
    liquidity risks, and default risks. Therefore, investors require extra returns for
    bearing each of these risks, called the risk premium.

    Answer and Explanation:


    The interest rate on a T-year bond = risk free rate + average inflation + maturity
    risk premium. To find the interest rate on bonds with different maturities, we
    need to compute average inflation and maturity risk premium in each case.

    For 1-year bond, inflation next year = 7%, maturity risk premium is 0.2%, so
    interest rare = 2% + 7% + 0.2% = 9.2%.

    For 2-year bond, average inflation rate = (7% + 5%) / 2 = 6%, maturity risk
    premium = 0.2% + 0.2% = 0.4%. So interest rate = 2% + 6% + 0.4% = 8.4%.

    For 3-year bond, average inflation rate = (7% + 5% + 3%) / 3 = 5%, maturity risk
    premium = 0.2% + 0.2%*2 = 0.6%. So interest rate = 2% + 5% + 0.6% = 7.6%.

    For 4-year bond, average inflation rate = (7% + 5% + 3% + 3%) / 4 = 4.5%, maturity
    risk premium = 0.2% + 0.2%*3 = 0.8%. So interest rate = 2% + 4.5% + 0.8% =
    7.3%.

    For 5-year bond, average inflation rate = (7% + 5% + 3% + 3% + 3%) / 5 = 4.2%,


    maturity risk premium = 0.2% + 0.2%*4 = 1%. So interest rate = 2% + 4.2% + 1% =
    7.2%.

    For 10-year bond, average inflation rate = (7% + 5% + 3% + 3% + 3% + 3%*5) / 10


    = 3.6%, maturity risk premium is capped at 1%. So interest rate = 2% + 3.6% +
    1% = 6.6%.

    For 20-year bond, average inflation rate = (7% + 5% + 3% + 3% + 3% + 3%*15) / 20


    = 3.3%, maturity risk premium is capped at 1%. So interest rate = 2% + 3.3% +
    1% = 6.3%.
    Case study 1

    Corporate philanthropy is always a sticky issue, but it can be justified in terms of


    helping to create a more attractive community that will make it easier to hire a
    productive work force. Corporate philanthropy, however, might be negatively perceived
    by

    b. Provided that the rate of return on assets exceeds the interest rate on debt, greater
    use of debt will raise the expected rate of return on stockholders' equity. Also, the
    interest on debt is tax deductible, which provides a further advantage. However, (1)
    greater use of debt will have a negative impact on the stockholders if the Company's
    return on assets falls below the cost of debt, and (2) increased use of debt increases
    the chances of going bankrupt. The effects of the use of debt, called "financial
    leverage," are spelled out in detail in Chapter 17.stockholders who do not live in the
    company's headquarters city (San Francisco in this case), because they do not see any
    direct benefits. Stockholders are interested in actions that maximize share price, and if
    competing firms are not making

    c. The company will be retaining more earnings, so its growth rate should go up, which
    should increase its stock price. The decline in dividends, however, will pull the stock
    price down. It is unclear whether the net effect on its stock will be an increase or a
    decrease in its price; the change will depend on whether stockholders prefer dividends
    or increased growth.similar contributions, the "cost" of this philanthropy has to be borne
    by someone—the stockholders. Thus, stock price could decrease.

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