Overview
Assessment 5
Respond to three questions and solve five computational problems related to stocks.
Companies can raise money through common stocks. Investors buy stocks and get the benefits of ownership of a firm. How to price stocks is the main objective of this assessment, in which you will learn about the differences between common and preferred stocks, the different stock valuation models, and the major stock market indexes.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Evaluate the global financial environment.
o Calculate how much money is needed to buy a specific amount of stock.
o Describe the advantages of stock ownership.
• Competency 2: Define finance terminology and its application within the business environment.
o Calculate the price of a share of stock using a stock’s earnings per share and P/E ratio.
o Calculate the value of a share of stock with constant growth.
o Calculate the value of a share of preferred stock.
o Explain the differences between key stock market measures.
o Calculate the percentage one-day return in the Dow Jones Industrial Average.
• Competency 3: Evaluate the financial health of an organization.
o Describe the rights of a shareholder.
Assessment Instructions-
Respond to the questions and complete the problems.
Questions
In a Word document, respond to the following. Number your responses 1–3.
1. Describe the rights and advantages belonging to shareholders
2. Explain the differences between the Standard and Poor’s 500 Index and the Dow Jones Industrial Average. Which is a better measure of stock market performance? Why?
3. Describe the differences between common stock and preferred stock.
Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.
Problems
In either a Word document or Excel spreadsheet, complete the following problems.
• You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.
In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.
Compute the following:
1. Imagine that on June 4, the Dow Jones Industrial Average closed at 13,598.14, which was up 148.86 points from the previous day’s close of 13,449.28. Calculate the return, in percent to four decimal places, of the stock market for June 4.
2. The cost per stock at a brokerage firm is $0.10. Calculate how much money you would need to buy 150 shares of HiTech, Inc., which trades at $18.22.
3. HiTech, Inc.’s growth for the future is forecasted to be a constant 10 percent. HiTech’s next dividend is expected to be $1.18. Calculate the value of HiTech stock when the required return is 12 percent.
4. Preferred stock from HiTech, Inc. pays $1.20 in annual dividend. Calculate the value of the stock if the required return on the preferred stock is 4.5 percent.
5. HiTech, Inc. has earnings per share of $1.82 and a P/E ratio of 31.54. Calculate the stock price.
Suggested Resources
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Library Resources:
• Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
• Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.
Course Library Guide
You are encouraged to refer to the resources in the BUS-FP3062 – Fundamentals of Finance Library Guide to help direct your research.
Other Resources
• Cornett, M., Adair, T., & Nofsinger, J. (2019). M: Finance (4th ed.). New York, NY: McGraw-Hill. Available in the courseroom via the VitalSource Bookshelf link.
Stocks Valuation
1.
Shareholders are individuals or entities that legally own another company’s shares. As legal owners of a portion of an organization, shareholders have rights and advantages of being in the shareholding position. According to literature, some of the shareholder rights include right to vote, action, elect and remove board members, to receive dividends and receive assets or value of a firm’s property in the event of liquidation (Mallin & Melis, 2012; Lapina et al., 2016). In essence, shareholders have a right to vote on matters affecting the organization such as corporate policing, issuance of new securities, leadership, and significant changes in the overall firm’s operations. Shareholders also have a right of action against oppressive practices within an entity. Moreover, it is the shareholders’ rights to receive profits according to the value of their shares in the firm.
The shares owned by shareholders enable them to enjoy advantages such as reaping benefits in dividends from the company’s success. Moreover, shareholders benefit from the company’s stock valuation, which allows them to profit by selling shares after a potential rise in the market prices.
Market watchers in the United States and other interested parties use the Dow Jones Industrial Average (DJIA) and Standard and Poor’s 500 indexes as the primary stock market indexes. In this context, a market index is a measure that monitors stocks’ performance. In essence, the DJIA and Standard and Poor’s 500 indexes portray the movement of stock prices; either upwards, downwards or sideways, and the magnitude of this movement.
Despite both being stock market indexes, DJIA and Standard and Poor’s 500 indexes vary based on the number of firm’s stocks that they represent. On the one hand, the Standard and Poor’s 500 index comprises 500 of the large publicly traded companies. On the other hand, the DJIA consist of 30 publicly traded firms chosen to represent other firms in different industries. Moreover, the standard and Poor’s 500 indexes are weighted by the market value, while the stock prices weight the DJIA. Standard and Poor’s 500 indexes is a better measure of stock market performance between the two market indexes because it comprises more stocks that industrial analysts can use to predict the stock market activities. Besides, unlike DJIA, which has 30 firms, Standard and Poor’s 500 index has a more comprehensive array of firms from different sectors, making it a better measure of stock market performance.
Preferred and common stocks are tools used by investors to represent their ownership of a company’s portion. These stocks vary significantly in terms of risk and rights. As the literature suggests, preferred stocks are less risky than common stocks (Brabenec et al., 2020). The less volatility of preferred stocks causes this variation because their prices do not change frequently compared to common stocks. Moreover, unlike in preferred stocks, holders of common stocks have a right to vote on company matters.
References
Brabenec, T., Poborsky, F., & Sabmannshausen, P. (2020). The difference between preferred and common stocks in Europe from the market perspective. Journal of Competitiveness, 12(3), 64-81. https://doi.org/10.7441/joc.2020.02.04
Lapina, Y., Kostyuk, A.N., Braendle, U., & Mozghovyi, Y. (2016). Shareholders rights and remedies (Comparative law perspective). Corporate Board: Role, Duties and Compositions, 12(3), 6-13. https://www.researchgate.net/deref/http%3A%2F%2Fdx.doi.org%2F10.22495%2Fcbv12i3art1
Mallin, C., & Melis, A. (2012). Shareholder rights, shareholder voting, and corporate performance. Journal of Management and Governance, 16(1), 171-176. https://doi.org/10.1007/s10997-010-9138-1