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Ch2 (2 1-2 4)

Money market securities are highly liquid and stable, allowing for quick conversion to cash with low transaction costs. The document includes calculations for equivalent taxable yield and rates of return for various stocks and market indices. It also discusses the impact of taxation on corporate income and after-tax returns.

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17 views2 pages

Ch2 (2 1-2 4)

Money market securities are highly liquid and stable, allowing for quick conversion to cash with low transaction costs. The document includes calculations for equivalent taxable yield and rates of return for various stocks and market indices. It also discusses the impact of taxation on corporate income and after-tax returns.

Uploaded by

matthew940510
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 2

12.
Money market securities are referred to as “cash equivalents” because of their great
liquidity. The prices of money market securities are very stable, and they can be
converted to cash (i.e., sold) on very short notice and with very low transaction costs.

16.
rm
Using the formula of Equivalent taxable yield (r) = , we get:
1－ t
0.04
a. r = = 0.04 or 4.00%
1－0

0.04
b. r = = 0.0444 or 4.44%
1 － 0.10

0.04
c. r = = 0.05 or 5.00%
1 － 0.20

0.04
d. r = = 0.0571 or 5.71%
1 － 0.30

19.

a.
At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80
At t = 1, the value of the index is: ($95 + $45 + $110)/3 = 83.33
V1
The rate of return is: － 1 = (83.33/80) – 1 = 0.0417 or 4.17%
V0

b. In the absence of a split, stock C would sell for $110, and the value of the
index would be the average price of the individual stocks included in the
index: ($95 + $45 + $110)/3 = $83.33.

After the split, stock C sells at $55; however, the value of the index should not
be affected by the split. We need to set the divisor (d) such that:
$95 + $45 + $55
=$83.33 →
d
d = 2.34

c. The rate of return is zero. The value of the index remains unchanged since
the return on each stock separately equals zero.
20.
a. Total market value at t = 0 is:
($90 x 100) + ($50 x 200) + ($100 x 200) = $39,000

Total market value at t = 1 is:


($95 x 100) + ($45 x 200) + ($110 x 200) = $40,500
V1
Rate of return = － 1 = ($40,500/$39,000) – 1 = 0.0385 or 3.85%
V0

b. The return on each stock is as follows:


V1
RA = － 1 = ($95/$90) – 1 = 0.0556 or 5.56%
V0
V1
RB = － 1 = ($45/$50) – 1 = –0.10 or –10.00%
V0
V1
RC = － 1 = ($110/$100) – 1 = 0.10 or 10.00%
V0

The equally-weighted average is


5.56% + ( –10.00% ) + 10.00%
= 1.85%
3

23.
87 days
Bank discount of 87 days: 0.034 x = 0.008217
360 days

a. Price: $10,000 x (1 – 0.008217) = $9,917.83

Face value － Purchase price


b. Bond equivalent yield =
Purchase price x T

$10,000 － $9,917.83
= 87 days = 0.0348 or 3.48%
$9,917.83 x 365 days

32.
The total before-tax income is $4.00. The corporations may exclude 50% of dividends
received from domestic corporations in the computation of their taxable income; the
taxable income is therefore: $4.00 x 50% = $2.00.
Income tax in the 30% tax bracket: $2.00 x 21% = $0.42
After-tax income = $4.00 – $0.42 = $3.58
After-tax rate of return = $3.58/$40.00 = 0.0895 or 8.95%

CFA 1
Answer: c. Taxation

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