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Stock Market Efficiency, Income from Stocks, Shareholder Rights

See the attached file.

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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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 ...

Solution Summary

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

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