Question

Answer the following questions:

1.) Suppose the realized rate of return on government bonds exceeded the return on common stocks one year? How would you interpret this result?
2.) What is more important to investors, the number of a company’s shares they own, the price of the company’s stock, or the percentage of the company’s equity they own? Why?
3.) A company wants to raise $ 500 million in a new stock issue, its investment banker indicates that the sale of new stock will require 8 percent underpricing and a 7 percent spread.(hint the underpricing is 8 percent of the current stock price, and the spread is 7 percent of the issue price.)
a.) Assuming the company’s stock price does not change from its current price of $ 75 per share, how many shares must the company sell and at what price to the public?
b.) How much money will the investment banking syndicates earn on the sale?
4.) Why do you suppose the smaller firms tend to rely on bank financing while larger companies are more apt to sell bonds in financial markets?

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1.) Suppose the realized rate of return on government bonds exceeded the return on common stocks one year? How would you interpret this result?

If the realized rate of return on government bonds exceeded the return on common stocks one year, then the stock market likely declined or remained relatively flat that year. While stocks generally have a higher expected return than government bonds, stock returns are more variable and the realized return can be negative.

2.) What is more important to investors, the number of a company’s shares they own, the price of the company’s stock, or the percentage of the company’s equity they own? Why?

Investors care more about the change in the price of the company’s stock. They could own a large number of shares and a lot of the company’s equity (and they may have more voting power and control that way) but if the price of the stock doesn’t increase, then they don’t earn a return on their investment (unless it has a very high and stable dividend.)...

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