Finance Securities Market

Required Resource
Melicher, R. W., & Norton, E. A. (2011). Introduction to finance (14th ed.). Hoboken, NJ: John Wiley & Sons.

“Securities Market” Please respond to the following: (No essay format is necessary)

Discuss the pros and cons of investing in the securities market and whether such investments would be a good investment for you personally right now. Explain your rationale.
Compare and contrast the potential benefits of the domestic securities market to those investing in the foreign securities markets. Provide specific examples to support your response.

1) You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million. The company articles of incorporation and state law place no restrictions on the sale stock to outsiders. An unexpected opportunity to expand arises that will require an additional investment of $ 14 million. A commitment must be made quickly if this opportunity is to be taken. Existing stockholders are not in a position to provide the additional investment. You wish to maintain family control of the firm regardless of which form of financing you might undertake. As a first step, you decide to contact an investment banking firm.

a) What considerations might be important in the selection of an investment banking firm?
b) A member of your board has asked if you have considered competitive bids for the distribution of your securities compared to a negotiated contract with a particular firm. What factors are involved in this decision?
c) Assuming that you have decided upon a negotiated contract, what are the first questions that you would ask of the firm chosen to represent you?
d) As the investment banker, what would be your first actions before offering advice?
e) Assuming the investment banking firm is willing to distribute your securities, describe the alternative plans that might be included in a contract with the banking firm.
f) How does the investment banking firm establish a selling strategy?
g) How might the investment banking firm protect itself against a drop in the price of the security during the selling process?
h) What follow-up services will be provided by the banking firm following a successful distribution of the securities?
i) Three years later, as an individual investor, you decide to add your own holding of the security but only at a price that you consider appropriate. What form of order might you place with your broker?

Problem 2.
In late 2010, you purchased the common stock of a company that has reported significant earnings increase in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.

Problem 3.
From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset.

Asset
Annual Returns
A 5%,10%,15%,4%
B -6%,20%,2%,-5%,10%
C 12%,15%,17%
D 10%,-10%,20%,-15%,8%,-7%

Problem 4.
Based upon your answers to problem 3, which asset appears riskiest based on standard deviation? Based on coefficient of variation?

Problem 5
Recalling the definitions of risk premiums in Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate, what is the risk premium from investing in each of the other asset classes listed in Table 12.4?

Problem 6.
What is the real, or after-inflation, return from each of the asset classes listed in table 12.4?
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