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Stock Market Efficiency, Income from Stocks, Shareholder Rights

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Question 1
If the stock market is semi-strong form efficient, should you spend time researching a company, analyzing sales and profit trends, the economy, etc.? Why or why not?

Question 2
Which provides more stable income, in general, and why: preferred stock or common stock?

Question 3
What is the preemptive right and what benefit does it have for the shareholder?

Question 4
Dividends in the coming year are expected to be $2.40 per share. Historically, dividends have grown at a 5% annual rate and this rate is expected to continue in the future. Based on current market conditions, a 13% return is required. What is the intrisic value of this stock?

Question 5
A share of preferred stock currently sells for $50.00 and pays a dividend of $3.00 annually. What rate of return is being earned on this stock (in percentage terms)?

Question 6
Amax, Inc. has a beta of 1.4. The yield on 10-year Treasury Bonds is 2% and the market risk premium is 5%. What is the cost of capital for common equity using the CAPM?

Question 7
How should a company adjust the cost of capital for risk?.

Question 8
What are two factors that the firm cannot control that affect WACC?

Question 9
What are 2 common problems in estimating beta?

Question 10
Equity capital raised by reinvesting retained earnings has no cost since the firm already has the money. Evaluate this statement.

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Solution Summary

The solution determines the stock market efficiency, income from stocks, shareholder rights, ROR, CAPM, risk and beta.

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Question 1
If the stock market is semi-strong form efficient, should you spend time researching a company, analyzing sales and profit trends, the economy, etc.? Why or why not?

Yes we should spend time researching a company, analyze its sales and profit trends. Because even if a market is semi-strong form efficient, an investor could still earn a better return than the market return if he or she had inside information.

Question 2
Which provides more stable income, in general, and why: preferred stock or common stock?

Preferred stocks tend to be more stable because of the regular income stream, while common stock can be relatively more volatile.

Question 3
What is the preemptive right and what benefit does it have for the shareholder?

The preemptive right is the right belonging to existing shareholders of a corporation to avoid involuntary dilution of their ownership stake by giving them the chance to buy a proportional interest of any future issuance of common stock.

There are two advantages to a corporation's stockholders of having preemptive rights. The primary advantage is the ability to maintain a proportional ownership of the corporation should it issue additional shares of ...

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