Instructions:
1. CEOs like to hide bad information from the financial market, what's the consequence? What can be done to prevent this?
2. What are the major differences between common stock and preferred stock?
3. Give three main reasons that a private firm wants to issue equity (IPO); give two main reasons that a public firm wants to go private.
4. Why securitization is common in highly developed financial market?
5. Assume that only the following three stocks exist in the financial market, calculate the price-weighted index, value-weighted index, and equal-weighted index. Assume initial index as 100.
| Stock Name |
Initial Price |
End Price |
Share (Thousands) |
| A |
50 |
80 |
5 |
| B |
60 |
40 |
2 |
| C |
20 |
12 |
20 |
| Index |
Initial Value |
End Value |
| Price-Weighted |
100 |
|
| Value Weighted |
100 |
|
| Equal-Weighted |
100 |
|
6. You are buying a put option of GM at a strike price of $75 and maturity of 1 months. The current trading price is $75. The price of the option is $2. What would be the major motive to buy the put option? What is the maximum loss for the investment? What is the maximum gain?
7. What's the benefit of buying on margin? If the initial margin is 50%, maintenance margin is 40%, when will you receive a margin call for the stock you bought at $50/share at margin?
8. Corporate governance is believed to promote long term goal of the firm. As such, investing in firms with good corporate governance has been proved to be profitable. Give two other aspects of "good firm", which you believe are associated with higher value / stock return in the long run.