Investments: first look

• asset classes 
• stocks, bonds and cash 
• other assets 
• stocks ( attribute classifications include growth or value stocks 
• domestic 
• large cap stocks lend more than 10 billion 
• mid cap stocks 2b-10b
• small cap stocks less than 10 billion 
• foreign 
• bonds 
• treasuries, corporate, municipal foreign etc. 
• junk bonds 
• cash 
• cd's, savings deposits, commercial papers 
• other assets classes 
• commodities: precious metals, agriculture 
• real estate properties,artwork, etc. 
• rate of return 
• arithmetic average returns 
• beta = co variance of the market and self/ variance of the market 
•  co variance of self and market/ standard deviation of self* standard deviation of market 
• co movement, market beta and correlation 
• historical data is very helpful-but can also mislead if it is not used carefully 
•   The only reason why we use historical data is because the alternative ( no data) us wirse 
• correlations and variance are more 
• investment-first look 
• overview if equity related market institutions 
• retail brokers - takes care of investor book-keeping 
• exchange - e.g. NYSE ( auction, market, electronic system), NASDAQ 
• specialist ( auction market)- assigned a stock and manage auction process with floor brokers 
• market maker ( broker/dealerZ) - liquidity provider, see order book 
• non-exchange outs out specialist and market maker 
• electric communication networks- allows investors to post price contingent 
• more mutual funds than stock today 
• investment companies under the 1940 act 
• Market transactions - execution at current market price 
• entry of corporate securities into the financial markets 
• \IPO 
• underwriters 
• reverse mergers 
• seasoned equity offeringsd 
• exit corporate funds from the financial markets 
• dividends 
• repurchases 
• delisting- when a public company goes private 
• limited liability 
• financial distress 
• mutual funds 
• Investment companies under the 1940's Act 
• UIT- closed ended fund created but allows for open-ended redemption, fixed termination date, not actively traded ( see ETF exception 
• Open-ended mutual fund - power to create shares at will and allow investor redemption at net asset value (NAV) that are posted daily, non-exchange traded 
• closed-ended mutual fund - one big IPO and investors and can invest in less liquid assets and investors cannot redeem shares for underlying value, exchange traded 
• exchange traded funds 
• overview of Equity related market institutions-transactions 
• market-execution at current market price 
• limited orders execute if a price is below or above a limit 
• market inflows and outflows 
• entry of corporate securities into the financial markets
• ipos 
• underwriter - sell stocks for companies 
• reverse mergers 
• seos 
• exit of corporate funds from the financial markets 
• dividends
• repurchases 
• delisting 
• limited liability 
• financial distress 
• investment risk and reward 
• measuring reward: the expected rate of return 
• measuring risk: the standard deviation of the rate of return 
• standard deviation = variance 0.5 
• prtfolio: a bundle of multiple assets 
• portfolio reward = sum of weighted average asset returns 
• portfolio risk = standard deviation of the overall portfolio of return 
• diversification 
• capital budgeting 
• long term projects 
• present value: translation of future cash flows into present value 
• net present value - difference between present value and initial cash outflow 
• Internal rate of return ( IRR) the constant rate of return that calculate 
• Internal rate of return ( IRR) 
• IRR can be calculated without knowing the expected rate of return ( or discount rate IRR only needs all relevant cas flow stream ( both initial cash out and future cash flows)
•  If expected rate of return is lower than IRR, then NPV> 0 i.e. postive 
• IF expected rat of return is higher than IRR, then NPV<0 i.e. negative 
• A unique IRR - 1 negative cash flow, follwoed by only positive net cash flows 
• IF there are nonnegative cash flows, then there is no IRR 
• If there at miltiple positive and negative cash flows, there may be more than one computed IRRs or no IRR 
• Value an Interest rate are opposites 
• capital budgeting 
• errors in cash flows forecast and cost of capital ( discount rate) 
• short term cash flows errors more important than discount rate errors 
• long term cas flow errors both forecasted amounts and discount rate are important ( harder to be accurate as we predict further into the future) 
• general capital budgeting practice 
• NPV is the most popular method 
• IRR can be used as a "hurdle rate" to screen projects 
• can use NPV and IRR 
• both may provide a positive 
• sometimes NPV and IRR reccomendations conflict; defer to NPV 
• Problems with IRR 
• not useful when there are both 
• profitability Index = present value( cash flows) / original cost 
• If positive PI, same interpretation as NPV and IRR ( i.e. good)  
• If negative PI, same interpretation as NPV and IRR ( i,e, bad) 
• problems with PI 
• no concept of scale ( some problem as IRR) 
• Riskiness of future cash flows not apparent 
•  Payback ( PB) - measures how quickly your initial investment is recovered in nominal dollars 
• discounted payback (DPB)- measures how quickly your initial investment is recovered in present value dollars 
• note: in the year of recovery, calculate partial year using remaining payback amount (PB or DPB) dividend by that years net cash flow ( PB or DPB) 
• problems with PB method 
• naive and dies not consider profibility project 
• capital budgeting -applications 
• dealing with promised rate and 
• capital budgeting-applications
• dealing with promised return and expected return 
• promised return and expected return 
• promised rerun includes credit risk ( or default risk) 
• expected return is adjusted for credit risk 
• promised return is adjusted for credit risk 
• economics of project interactions 
• projects are not always independent 
• project selection rule 
• consider all possible project combinations 
• select combinations that provides the best NPVs
• how to make optimal project combinations 
• heuristic algorithm - consider all projects and combone one at a time 
• e.g. rank each project by its NPV 
• add next highest NPV project and evaluate combined NPV
• Repeat the remaining list until no additional value C can be generated 
• Project pairs - overall NPV = NPV project1 + NPV project 2 + NPV interactions 
• evaluate each pair of projects and classify them as follows 
• 1. projects with positive interactions - taking these projects increase firm value 
• 1. project with zero interactions - taking these projects leave the firm value unchanged 
• 3. projects with negative interactions - taking these projects decrease firm value 
• capital budgeting - applications 
• new projects - incremental analysis 
• use marginal analysis to evaluate a new project 
• the addresses the economies of scale phenomena
• assist in identifying sunk cost which are irrelevant to optimal decision making watch outfit avoidable and unavoidable overhead allocated expenses  
• excess capacity or limited capacity 
• when the excess capacity, the relevant costs are incremental 
• when there is no excess capacity, there is additional cost to include i.e. oppurtunity cost 
• economies of scale 
• average product unit cost reduces as production increases ( key contribution to large firm success) 
• making bad choices due to errors and bias 
• tendency for management to confuse mode, mean, typical or most likely returns with the expected return 
• misinterpretation of promised return and expected return 
• does risk reduction create value 
• does corporate risk management create additional value 
• misuse of cost capital 
• managerial gaming ( e.g. "horse trading" ) 
• behavioral bias 
• tendency for management to confuse mode, mean, typical or most likely returns with the expected return 
• misinterpretation of promised return and expected return 
• does risk reduction create additional value 
• does corporate risk management create additional value
• does corporate risk management create additional value misuse of cost of capital 
• managerial gaming (e.g. " horse trading")
• behavioral bias 
• tendency for managment to confuse mode, mean,typical or most likely returns with the expected return
• misinterpretation of promised return and expected return 
• does risk reduction create additional value does corporate risk managmente create additional value 
• capital asset pricing model 
• required expected rate of return (E(r1)) = r beta + beta (rm-rf) 
• where rf= risk free rate of return, rm= expected market rate of return 
• beta = covar(ru.rm)/ var(rm) i.e. comovement of "I" relative to market movement 
• ignores standard deviation 
• Assumes already holding diversifies market portfolio 
• not rewarded by unsymmetrical risk 
• Interesed in Comovement with market only as a measure of risk 
• security market lime (sml)
• A graph of the CAPM: 
• promised rate of return = time premium + expected risk pre IBM + default premium 
• risk free rate 
• equity risk premium 
• no one really know the correct number 
• historical statistical data and back out the risk free approach 
• complications - which rfr to use ? Use arithmetic or gemotric averages? which periods? 
• margin of error - longer periods provides more stable or lower margin of errors i.e. std dev/ period length 0.5 
• critical events - gloss over ignore crisis e.g. market crisis, financial meltdowns, etc (fatal events) Consensus approach survey financial practitioners and build consensus estimates 
• internal cost of capital approach 
• combine survey methods ( e.g. Analyst projections for s and p 500) and analysis of internal cost of capital -hybrid approach 
• beta 
• different for each project unlike ( rfr and erp which are the same for all projects) 
• Historically betas are unstable i.e. period selection procedures different calculated betas 
• very low or very high beta assets tend to have stddev. 
• shrinking ( rationale is " reversion to mean") I.E. add a portion of beta = 1.0 to calculate beta 
• If an asset has a beta of 1.0 the asset behaves like the market 
• betas 
• historically betas are unstable I.e. period selection procedures different calculated betas 
• very low or very high beta assets tend to have stddev 
• shrinking ( rationale is " reversion mean") i.e. add a portion of beta = 1.0 to calculate beta 
• if an asset has a beta of 1.0 the asset behaves like the market 
• betas 
• Beta firm = beta debt*( debt value/firm value)+ beta equity * ( equity/ firm value) 
• certainty equivelence value ( CEV) - value of expected risk-free cash flow 
• CEV= PV of CE cash flows discounted at risk free rate ( I.E. beta = 0) Betas are volitilie and useful for short horizon only. Unreliable for multi-year horizons 
• Capital asset pricing model 
• CAPM model - caution! works perfectly in a perfect world 
• empirical evidence is weak or non-existent to support CAPM 
• Be aware that accepting it use is based on the belief that it should work 
• market imperfections and distortions 
• perfect market assumption challenges 
• no differences in opinion 
• 1 sider information 
• different interpretations of uncertainties by different investors ( judgment calls) 
• infinently many investors and firms 
• Private firms have few investors and experience liquidity challenges to sell itself 
• few players within industry 
• no transaction costs ( regular daily transaction costs are very low today) SEC documentation 
• No taxes 
• Firms Pay income taxes 
• Individuals pay income, capital gains tax, different tax rates 
• tax exemptions/reductions-- corporations pay reduced taxes on dividend income, interest rate deductions for tax purposes, capital gain t 
• efficient markets and behavioral finance market efficiency - market uses all available information in setting the price 
• A price is efficient of the market set the price correctly using all available information 
• not the same meaning as mean-variance efficient ( used to optimize portfolio) 
• Market not efficient when it comes to insider information 
• short-term versus long-term efficient 
• market efficiency can peruse over the long horizon( hard to diaprove 
• no one really knows what is the long horizon ( horizon to disprove) 
• no one really knows what is long term required return ( its an educated guess) 
• long run return estimates are generally within a reasonable gray area 
• over short-terms expectations reasonable accurate ( prices should only move when there are news I.E. un anticipated or expected events 
• perfect market and efficient market 
• a perfect market is by definition perfectly efficient 
• an impact 
• efficient market dynamics 
•  transaction costs reduces efficiency 
• Investors competition promotes efficiency ( cost reduction and price discovery) 
• prices have a tendency towards efficiency ) i.e. nobody likes to hold overpriced assets) \
• Importance of efficient market 
• prices can be trusted- promotes market development and growth 
• classical finance believers 
• classical finance subscribers to market efficient theory (EMT) but at various degrees 
• weak market efficiency ( only historical prices at reflected in today's prices) 
• technical analysis cannot beat the maker because it is the best technical analyst 
•  semi strong market efficiency ( all public information is reflected in today's prices) 
• technical analysis and fundamental analysis cannot eat the market because the market is the best in both 
• strong market efficiency ( all public information is reflected in today's prices) 
• technical analysis and fundamental analysis cannot eat the market because the market is the best in both 
•  even insider information is reflected in prices such that no one can beat the market; its the best analyst 
• Hardly anyone believes markets are strong from market efficient 
• behavioral finance believers ( investor psychology- cognitive bias cause mistakes) 
• many investors are " loss-averse" and some 
• Anomalies ( events) e.g. unable to find shares to short after and am and a announcement 
• Predictive bias - investors believe the ability/knowledge to predict the future and act on them 
• contratian- cognitive bias are powerful in small investors and these "errors" are consistent enough to encourage contrarian investors to act opposite of the general investing trend 
• momentum strategies - buying/selling stocks that gone up /down
• capital structure 
• maximize equity value? or maximize firm value 
• all equity- easy! maximize shareholder wealth 
• when there are other claims- not so clear cut. firm value = all claimants interests
• balance conflicted interests between maximizing shareholder value and for, value
• management reports is to BOD to shareholders; source of conflicts from interest trade off 
• firm value is the priority - increasing equity value by reducing liability value ultimately
• reduces firm value and therefore equity value as well 
•  the cost of x-post actions against claimants is borne by claimants tomorrow and internalized by owners today I.E. future behavior impact corporate value today 
• Accordingly, today's firm prices should have already take into account what a firm is likely to do in the future 
• Goal-design capital structure to maximize overall firm value today 
• Competitive ( perfect) markets exert pressure amongst management teams to improve capital structure 
• optimal capital structure theory is the insight that firm wants to maximize firm value 
• Modigliani-miller ( m and m) propositions - in a perfect market: 
• The firm value is derived from the earnings and risk underlying real assets independent of the mix of equity and debt securities issue 
• Accordingly, there is a parity between 
• (Debt/firm)*1+(E(rd))+( Equity/firm) *1+E(re))= 1+E(rf) 
• leverage, cost of capital and quoted interest rate 
• review scenarios of different debt and equity payoff and expected returns 
• non financial liabilities and the cost capital 
• many companies have total
• capital structure 
• weighted average cost of capital (WACC) 
• marginal and weighted average cost of capital 
• In a perfect market, the average cost of capital = marginal cost of capital 
• In the real world, they are not equal such that firms average 
• Taxes are a key violation of the m and m perfect market assumptions 
• interest paid by a firm is deductible for tax purposes 
• Tax - adjusted valuation methods 
• Adjusted present value (APV) 
• Tax-adjusted weighted average cost of capital (WACC)
• Flow-to-equity direct 
• tax and capital structure 
• suitable for use when cash flows are constant, tax shield dollars are constant  
• flow to equity direct value 
• prepare a ori-forms project cash flows 
• marginal cost 
• so far our analysis provides average cost of capital 
• For decision-making purposes, the marginal cost of capital is more relevant as the next project requires incremental capital increase at marginal cost 
• as capital increases, the WACC usually increases 
• marginal cost of capital 
• so far our analysis provides average cost of capital 
• for decision making purpose, the marginal cost of capital is more relevant as the next project require incremental capital increase at a marginal cost 
• As capital increases, the WACC usually increases 
• so far our analysis provides average cost of capital for decision-making purposes, the marginal cost of capital is more relevant as the next project requires 
• other imperfections and capital structure 
• as capital increasees, the WACC usually increases 
• For decision-making purposes, the marginal cost of capital is more relevant is more relevant as the next project requires 
• other imperfections and capital structures 
• taxes 
• complexities in taxes and interrelationship between firm and claim values 
• Tax shield-e.g. deductability of interests on debt 
• non financial claims ar NE zero 
• other imperfections 
• financial stress ( I.E. bankruptcies etc.) 
• operational distortions of incentives ( agency conflicts) 
• Information inefficency ( e.g. insider information) 
• transaction costs ( friction) 
• In a perfect market, capital structure does not matter only risk and reward parity matters 
• when there 
• taxes 
• tax distortion son firm value 
• interest expense qualifying as tax deduction has tendency toward 100% debt structure - add extra value to firm 
• offset: more debt creates higher equity risk lending to reduced accss to further capital funding 
• financial stress lending to bankruptcy ( under negative financial leverage conditions) ; a heavy cost 
• direct bankruptcy cost 
• indirect bankruptcy cost include rejecting optimal NPV projects in order to avoid risks, losing key customs, suppliers may charge more, losing credit etc. 
• nonfinancial claims 
• optimize use of "free" NFL as +ve NPV contributor - a "real option; clear decision path 
• market imperfections can be exploited to benefit one class of for claimants 
• operational distortions incentives - underinvestment problem 
• shareholders incentives diverge from bond holders incentives if firm gets close to financial distress 
• The inside information problem might not result in a higher cost of equity if  A investors are overly pessimistic     B the firmʹs management is known to be overly optimistic   C investors are overly optimistic     D the firmʹs management is known to be overly pessimistic            
• 2 If a firm uses less debt in its capital structure than is optimal, then  A there will be less free cash flow for managers to invest in positive NPV projects  B all of them       C its investors will pay more in personal income taxes than is necessary  D the firm will pay more in corporate income taxes than is necessary           
• 3 
• The best method to use to value a firm under a given capital structure when numerous market imperfections (e.g., agency issues, personal taxes, and transaction costs) exist is the  A flow-to-equity method      B adjusted present value (APV) method     C KISS method      D weighted average cost of capital (WACC) method             4 Which of the following statements is true?  A When calculating the WACC, the promised, after -tax return on debt should be used  B When using CAPM to estimate a WACC, you should use the relevant, after -tax risk-free rate and the after-tax expected return on the market, taking both corporate and personal tax rates into account 
•  C 
• When using CAPM to estimate a WACC, the expected return on the market portfolio should be the expected return on a stock market index (e.g., the S&P 500 Index) when calculating the cost of equity capital, and it should be the expected return on a bond market index when calculating the cost of debt capital  
• D 
• When using CAPM to estimate a WACC, personal taxes are not deducted since the corporation must compensate investors for the extra tax obligations they incur           
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• FIN 3030 – MOCK FINAL 
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• 5 
• A firm has a market value of $450 million, $150 million of which is debt.  Its equity beta is 1.5, and the beta of the debt is 0.2. The firm pays taxes at the marginal rate of 35%. The expected return on the market is 11%, and the relevant risk -free rate is 3%.  What is the firmʹs WACC?  Round your answer to the nearest tenth of a percent.  A 13.0%       B 7.2%       C 11.0%       D 18.0%        
• 6 
• A firm has a market value of $9 million, $1 million of which is debt.  Its equity beta is 1.1, and the firm's debt is considered risk-free. The firm pays taxes at the marginal rate of 35%. The expected return on the market is 10%, and the relevant risk -free rate is 3%.  What is the firmʹs WACC?  Round your answer to the nearest tenth of a percent.  A 9.7%       B 6.5%       C 10.0%       D 12.7%                
• 7 
• If interaction effects make it difficult for a firm to adjust its capital structure based on prevailing conditions, then  A the firm should use more equity financing than is necessarily optimal today  B the firm should choose the capital structure that will minimize all transaction costs--both direct and indirect  C the firm should target a 50% debt/50% equity capital structure   D the firm should use as much debt financing as possible when it is financially healthy in order to benefit from lower corporate taxes           8 Which of the following statements is true?  A Both share repurchases and cash dividend payments reduce firm size  B Both cash dividends and share repurchase will cause a firm's size to decrease and debtequity ratio to decrease  C Share repurchases reduce firm size while cash dividend payments have no effect on the size of a firm  D Both cash dividends and share repurchases will cause a firmʹs debt -equity ratio to decrease           
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• 9 
• On May 28, 2016, the board of directors of Hasbro, Inc. announced that it would pay a dividend of $0.3 a share on July 10 2016, to shareholders of record as of July 1 2016. In order to receive this dividend, an investor would have to purchase the stock on or before  A July 10, 2016      B the cum-dividend date      C May 28, 2016      D July 1, 2016                
• 10 
• On July 28, 2016, American Capital Agency declared a cash dividend of $0.27 a share, to be paid on September 11, 2016, to shareholders of record as of September 2, 2016. The ex -dividend date is August 30, 2016. In order to receive this dividend, an investor would have to purchase the stock on or before  A September 11, 2016      B August, 29, 2016      C September 2, 2016      D July 28, 2016               
• 11 Which of the following statements regarding dividend reinvestment plans (DRIPs) is true?  A DRIPS typically allow shareholders to avoid paying brokerage fees  B Many DRIPs allow shareholders to purchase shares of the stock at lower-than-market prices  C Shareholders can avoid taxes that they would have had to pay if they reinvest the dividends through a tax qualified DRIP rather than receiving the cash payment  D all of them        
• 12 A stock dividend  A increases the earnings per share of the firm    B increases the aggregate market value of the firmʹs stock   C increases the total wealth of the shareholder    D reduces the market price per share of the firmʹs stock    
• 13 
• A firm has 10 million shares outstanding, and the market value per share is $25. If the firm executes a 3-for-1 stock split, what will the total market value of the shares then be?  A $250 million       B $333 million       C $750 million       D $83 million        
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• FIN 3030 – MOCK FINAL 
• 14 
• A firm has 1 million shares outstanding and produced income of $1.9 million this year. The market price of the stock is $45. If the firm pays a 8% stock dividend at the same time as the earnings announcement, what will the earnings per share be after this dividend is paid?  A $1.90        B $3.60        C $1.76        D $2.05         
• 15 
• You own 600 shares of a firm that has 100 million shares outstanding. The market price per share is $51. If the firm declares a 20% stock dividend, how many shares will you own after the dividend is paid, and what will the market price per share be?  A 720 shares at $40.8 per share     B 600 shares at $61.2 per share     C 720 shares at $42.5 per share     D 600 shares at $42.5 per share      16 A reverse stock split will  A reduce the total market value of the firmʹs equity    B reduce the market price per share of the firmʹs stock   C increase the number of shares outstanding    D increase the market price per share of the firmʹs stock            
• 17 
• A firm has 2 million shares outstanding, selling for $3 a share.  If the firm does a 1 -for-4 reverse split, how many shares will be outstanding and what will the market price per share be?  A 12 million shares at $16 per share     B 0.75 shares at $0.75 per share     C 0.50 million shares at $12 per share     D 12 million shares at $0.75 per share      18 Which of the following about stock repurchase plans is true?  A Most share repurchases are executed via firmsʹ simply buying their own shares on the open market  B Most share repurchases are conducted by notifying shareholders that the firm wants to repurchase a specified number of shares at a specified price that is usually 15 -20% above the current market value with a request for interested shareholders to tender their shares  C Once a firm announces that it plans to repurchase a specific number of its shares on the open market, it is obligated to execute the repurchase within the next one to three years  D The numerous SEC filing requirements make the transaction costs of share repurchases prohibitively high 
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• 19 
• When a corporation makes an offer to buy back shares from specific shareholders at an abovemarket price, it is called a  A open-market repurchase      B auction-based repurchase     C targeted repurchase      D tender offer        20 In which of the following situations might a stock repurchase result in increased firm value?  A when a firm executes a targeted repurchase in order to buy back shares from specific shareholders at above-market prices  B Stock repurchases never increase or decrease the value of the firm  C when a firm without any positive NPV projects executes a repurchase to distribute excess cash flow to the shareholders  D when a firm does an open market, rather than an auction -based, repurchase   21 In which of the following situations might a stock repurchase result in decreased firm value?  A Stock repurchases never increase or decrease the value of the firm  B when a firm does an open market, rather than an auction -based, repurchase  C when a firm without any positive NPV projects executes a repurchase to distribute excess cash flow to the shareholders  D when a firm executes a targeted repurchase in order to buy back shares from specific shareholders at above-market prices   
• 22 
• A firm has 300 stockholders, each of whom own $100 in shares. If the firm uses $10000 to repurchase shares, how many stockholders would remain, and what would be the value of their shares?  A 200 shareholders with shares worth $100    B 300 shareholders with shares worth $66.67    C 200 shareholders with shares worth $133.33    D 200 shareholders with shares worth $66.67     
• 23 
• A firm has 900 shareholders, each of whom own $47 in shares.  The firm uses $22000 to repurchase shares.  What percentage of the firm did each of the remaining shareholders own before the repurchase, and what percentage does each own now?  A 0.11% before; 0.17% after     B 0.17% before; 0.17% after     C 0.11% before; 0.23% after     D 0.11% before; 0.11% after      
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• FIN 3030 – MOCK FINAL 
• 24 
• A firm has 100 shareholders, you among them. Each shareholder owns $25 worth of stock. In addition, Mr. Doubtful owns 60 shares (for a firm total of 500 shares) and is trying to fire the management. In an attempt to buy him off, management has offered to buy Mr. Doubtful's shares for $29. What will the new share price be?  A $2.50       B $29.00        C $17.00        D $5.00         
• 25 
• A firm has 2000 shares.  Both you and Ms. Doubtful are among them. Ms. Doubtful owns 175 shares and is trying to fire the management, so management is offering to buy her out for a $10 a share premium.  The current market price per share is $30. What will be the value of each of your shares if Ms. Doubtful takes this offer?  A $39.50        B $30.00        C $29.04        D $34.75         
• 26 In which of the following scenarios might a dividend or stock repurchase increase firm value?  A The firm issues debt in order to make the dividend payments or repurchase the stock  B Dividend payments and stock repurchases neither increase nor decrease firm value  C The firm makes a big dividend payment to its shareholders when management realizes that it is close to bankruptcy  D The firm repurchases its shares in lieu of undertaking some projects with small, positive NPVs   
• 27 
• Assume that dividends are taxed at your marginal tax rate of 25% while capital gains are taxed at 15%. How much more will you net if you earn $1000 in capital gains than if the $1000 were dividend income?  A $150.00        B $170.00        C $250.00        D $100.00         
• 28 
• Assume that dividends are taxed at your marginal tax rate of 38% while capital gains are taxed at 15%. How much more will you net if you earn $1200 in capital gains than if the $1200 were dividend income?  A $276.00        B $180.00        C $456.00        D $300.00       
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• FIN 3030 – MOCK FINAL 
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• 29 
• The market price of a firmʹs stock increased 8% each year for three years. If both capital gains and dividends are taxed at 20%, how much greater would your after-tax return have been if you sold the stock at the end of three years than if the firm had instead paid out 8% a year in dividend income?  A 62 basis points      B 120 basis points      C 80 basis points      D 158 basis points       
• 30 Which of the following statements regarding capital gain income and dividend income is true?  A Tax clienteles among retail investors minimize the tax penalty on dividend income  B Capital losses can be used to offset both capital gain income and dividend income, which results in lower personal income taxes on your investment income  C none are true      D Income in the form of capital gains enables an investor to minimize his personal tax liability more than dividend income does