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# Holding period for securities

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(Buying and selling marketable securities) Pearl Islands Tour Operator, located in the Pacific Ocean near Panama City, has effectively collected
\$1,500,000 in excess cash that it plans to invest in marketable securities. The firm will have to pay total transaction costs of \$30,000 to buy and sell the securities.

A) Would you recommend purchasing the securities if they yield 8.25 percent annually and are held for

1. One month?
2. Two months?
3. Three months?
4. Six months?
5. One year?

B) What minimum required yield would the securities have to return for the firm to hold them for 3 months? ( What is the break-even yield for a
3-month holding period?)

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#### Solution Preview

A. The firm incurs 30,000 to buy the securities. The interest from the securities should be moe than 30,000 to purchase them.
1. The interest for 1 month is ...

#### Solution Summary

The solution explains how to determine the minimum holding period for securities.

\$2.19

## Investment Fundamentals and Portfolio Management: return on stock, holding-period return on investment, margin account, market price per share, value of stock, expected return of the portfolio, beta of the portfolio, CAPM, value of options at expirationWhopie, market to book value ratio, earnings multiple, Elvis Alive Corporation,

1. John Smith has been reviewing the stock of ABC. John has estimated that the stock will have the following possible returns and probabilities:

Return Probability

-0.15 0.10
-0.05 0.20
0.05 0.35
0.15 0.25
0.25 0.10

a. Compute the expected return on ABC stock.
b. Compute the standard deviation of returns on ABC.

2. A stock sells for \$67 per share and pays a quarterly dividend of \$0.50. One year later, the stock sells for \$76.

a. Compute the holding-period return on this investment.
b. Compute the holding period return assuming that the investor could buy this stock borrowing half of the purchase price at 12 percent per annum interest.
c. Compute the holding period return (including the information from part b) if the investor pays a commission of \$0.40 per share on both the purchase and sale transaction.

3. You open a margin account with a brokerage firm. The initial margin requirement is 50 percent, and the maintenance margin requirement is 25 percent. You purchase 100 shares of a stock selling for \$40 per share.

a. How much money do you need to have in your margin account to make this purchase? (Ignore commissions.)
b. What is the amount of your margin loan from the broker?
c. If the stock falls to \$32, what is the margin in the account?
d. At what stock price will you receive a margin call?

4. What is the market price per share of Whopie, Inc. if the firm had net income of \$200,000, earnings per share of \$2.70, total equity of \$800,000, and a market to book value ratio of 1.5?

5. The companies in the electrical parts industry have an average earnings multiple of 16. John's Parts, Inc. manufactures electrical parts, and you have forecast that the company will earn \$3.60 per share and its stock will sell at the industry average multiple 3 years from now. Estimate the value of John's Parts stock in 3 years. If the required rate of return is 14 percent, what is the present value of John's Parts stock?

6. Tom Jones has identified the following securities for a portfolio:

Security Amount Invested Expected Return Beta

A \$25,000 0.05 1.4
B \$35,000 0.11 0.1
C \$5,000 0.15 0.5
D \$35,000 0.01 1.9

Compute the expected return of the portfolio. Compute the beta of the portfolio.

7. The Elvis Alive Corporation, makers of Elvis memorabilia, has a beta of 2.35. The return on the market portfolio is 13%, and the risk-free rate is 7%. According to CAPM, what is the risk premium on a stock with a beta of 1.0?

8. Discuss the 3 forms of market efficiency and the evidence for each form of market efficiency.

9. Compute the value of the following options at expiration:

a. An IBM July 90 call when IBM sells for \$98
b. An Eastman Kodak April 25 call with the stock priced at \$19
c. A Wall-Mart January 60 put with Wal-Mart stock selling for \$48
d. A Pfizer October 35 put with the stock priced at \$42.

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