# Finance Ch 3 And Ch 4 Exercises

Chapter 3
12. Suppose you short-sell 100 shares of IBM, now selling at \$200 per share. (LO 3-4)
a. What is your maximum possible loss?
b. What happens to the maximum loss if you simultaneously place a stop-buy order at \$210?

14. DRK, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s
explicit fees were \$60,000. The offering price for the shares was \$40, but immediately
upon issue, the share price jumped to \$44.

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a. What is your best guess as to the total cost to DRK of the equity issue?
b. Is the entire cost of the underwriting a source of profit to the underwriters?

15. Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at
\$40 per share. She borrows \$4,000 from her broker to help pay for the purchase. The
interest rate on the loan is 8%. (LO 3-4)

a. What is the margin in Dée’s account when she first purchases the stock?
b. If the share price falls to \$30 per share by the end of the year, what is the remaining
margin in her account? If the maintenance margin requirement is 30%, will she

16. Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams
from the previous question. The initial margin requirement was 50%. (The margin
a. What is the remaining margin in the account?
b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c. What is the rate of return on the investment?

17. Consider the following limit order book for a share of stock. The last trade in the stock
occurred at a price of \$50. (LO 3-3)
Limit Buy Orders Limit Sell Orders
Price Shares Price Shares
\$49.75 500 \$50.25 100
49.50 800 51.50 100
49.25 500 54.75 300
49.00 200 58.25 100
48.50 600

a. If a market buy order for 100 shares comes in, at what price will it be filled?
b. At what price would the next market buy order be filled?
c. If you were a security,would you want to increase or decrease your inventory of
this stock?

Chapter 4
11. An open-end fund has a net asset value of \$10.70 per share. It is sold with a front-end
load of 6%. What is the offering price?

13. The composition of the Fingroup Fund portfolio is as follows:
Stock Shares Price
A 200,000 \$35
B 300,000 40
C 400,000 20
D 600,000 25
The fund has not borrowed any funds, but its accrued management fee with the portfolio
manager currently totals \$30,000. There are 4 million shares outstanding. What is
the net asset value of the fund?

15. The Closed Fund is a closed-end investment company with a portfolio currently worth
\$200 million. It has liabilities of \$3 million and 5 million shares outstanding. (LO 4-3)

a. What is the NAV of the fund?
b. If the fund sells for \$36 per share, what is its premium or discount as a percent of NAV?

16. Corporate Fund started the year with a net asset value of \$12.50. By year-end, its NAV
equaled \$12.10. The fund paid year-end distributions of income and capital gains of
\$1.50. What was the rate of return to an investor in the fund?

22. The New Fund had average daily assets of \$2.2 billion in the past year. The fund sold
\$400 million and purchased \$500 million worth of stock during the year. What was its
turnover ratio?

24. You purchased 1,000 shares of the New Fund at a price of \$20 per share at the beginning
of the year. You paid a front-end load of 4%. The securities in which the fund
invests increase in value by 12% during the year. The fund’s expense ratio is 1.2%. What
is your rate of return on the fund if you sell your shares at the end of the year?

27. Suppose that every time a fund manager trades stock, transaction costs such as commissions
rate is 50%, by how much is the total return of the portfolio reduced by trading
costs?

28. You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management
fees of the fund are .6%. What fraction of portfolio income is given up to fees?
If the management fees for an equity fund also are .6%, but you expect a portfolio return
of 12%, what fraction of portfolio income is given up to fees? Why might management
fees be a bigger factor in your investment decision for bond funds than for stock funds?
Can your conclusion help explain why unmanaged unit investment trusts tend to focus
on the fixed-income market?

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