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Stock dividend and stock split, futures, options

1. Why might a stock dividend or a stock split be of limited value to an investor? Does it make sense for a corporation to repurchase its own stock? Explain.

2. Suggest two areas where the use of futures contracts are most common. What percent of the value of the underlying security is typical as a down payment in a futures contract?

3. You buy a stock option with an exercise price of $50. The cost of the option is $4. If the stock ends up at $56, indicate whether you have a profit or loss with a call option? With a put option?

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1. Why might a stock dividend or a stock split be of limited value to an investor? Does it make sense for a corporation to repurchase its own stock? Explain.

A stock split is of limited value to an investor because if the stock is divided into more parts, the total value of the stock is also divided in that manner. For example, if there is a stock split of 1/2 for a $100 dollar stock, the price of the stock after the split will be $50, which means that even though the investor has more no. of stocks, it has no effect on his total wealth which remains the same. Similarly, after the dividend, stocks start trading at ex-dividend price which means that amount of dividend is deducted from the stock price.

Stock repurchase plans provide many benefits to corporations and their shareholders. These can be both economic and tax benefits, but care must be observed in pursuing capital gains treatment, which is the principal tax benefit to the ...

Solution Summary

Stock dividend and stock split, futures, and options are discussed in detail in this 669 word response that includes references.

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