Capital market exercise

Adhita Fatikha I. ( C1L011008)

1. To predict securities return can used: Single factor model and Single market model, give
your explanation about the models Answer: Single factor model : A way to predict stock price or return by using a single factors as predictors of who is considered influential to a securities Its meant by a factor here is variables from macroeconomic factors or microeconomic factors However, There is no one factor that could affect the stock price for long periods of time Nowadays, the economic development is very rapidly so that the many factors that affect change in stock price

Single market model : It is a way to predict the price of securities or return by using the market index as a predictor of market index, since it is considered to have an effect on the prices of securities. Prediction of stock price or return more easily done using single market model Composite stock price index (IHSG BEJ) and the LQ45 index can be used as market index To get the structure of the best model needs to be done the experiments on various initial sets and training set. However, a structure model will never occur for a long period. So it is necessary to obtain the structure of the new model based on latest data every time will do the prediction of stock prices

2.

Why in single factor model we use daily and monthly data to predict? Give your explantion! Answer: Because of the rapid changes in the factors, better stock price prediction made for a short time, such as weekly or monthly. Prediction of stock prices over time is certainly an element of a greater prediction error.

 If the price of daily, want to predict means of data used is up with the data yesterday If you want to predict stock prices next week, you should be used latest data and data the previous week If you want to predict stock prices this month you should be used latest data and data last month 3. What is the different between stock deviden and cash diveden? Which is better a cash dividend or a stock dividend ? Answer: Stock dividen : Dividends are payments by a company to its shareholders. However, rather than paying in cash, the company distributes additional shares to its shareholders. Critically by doing so it increases the amount of issued shares. Cash dividend :is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations The better is stock dividend because The shareholder can either keep the shares and hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however, if a stock dividend has an cash-dividend option, even if the shares are kept instead of the cash. 4. Give your explanation about stock split! Answer: Stock split: An increase in the number of shares outstanding by reducing the par value of the stock. For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds. One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots.

5.

What is the effect of stock split for stokeholders? Answer:

The effect stock split for stockholders is stock split does not change the total value of the company's outstanding shares, a split can boost buying interest in the stock. A stock split is viewed as a positive event. Many companies that have provided longterm positive returns to stockholders have also declared regular stock splits to keep the share price in a range that is attractive to investors. At the extreme, very few investors want to buy shares that cost $1,000 or more. If company declares regular stock splits, the stockholder value can continue to grow without the share price becoming unattractively high

6.

Give your opinion about this picture

Answer: To get the best model structure, its important to do an experiment like initial set and training set. However, the structure of the model will never apply for a long period of time. So it needs to obtain new structural model based on the latest data each time it is to predict the stock price. Initial set: data used to determine a stock price daily, or weekly, or monthly to see the prospect of investing on capital market. Training set: make a predictions about stock price daily, weekly, or monthly to decide whether buy or sell or hold the stock

7. One of The methods of calculate stock is using earning per share. Give your explanation Answer: Earning per share is The portion of a company's profit allocated to each outstanding share of common stock.Earnings per share serves as an indicator of a company's profitability .Earnings per share is generally considered to be the single

most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio, Calculated as:

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period 8. Please give your explanation about Options, Rights, and Warrants ! Answer: Options : A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Rights : A security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally at a discount to the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire Warrant : A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors

9. What is a price earning ratio? And what is its strenght and weakness? Answer: Price earning ratio : A valuation ratio of a company's current share price compared to its per-share earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects

Weakness

Will not know if there was a gain on sale of assets that catapulted the EPS. Would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. Strength More useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E.

10.

What is mean about stock collapsed?why it could be happen? Give your explanation. Answer: A Stock collapsed is also called stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculativestock market bubbles. crashes usually occur under the following conditions, a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants. stock crashed or stock collapsed also could be occur cause by inflation that changed any time and can't be predicted, and usually it will occur if there is inaccuracy in predicting the value of the stock in the future at an estimated inflation rate of 0%

CASE 1. Fun Corp. decides on a 2 for 1 split of its stock. You own 78 shares on the day of the split. The stock splits at a price of $66.36 per share. A. Shares after split : 78 shares x 2 = 156 shares B. New price/shares after split : $66.36 / 2 = 33.18 /share C. Money did make on the split is none 2. On December 31, 2008, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2009. A. make the December entry

Dec. 31

Retained earnings Common Stock Dividend Distributable Paid In capital in excess of par value Declared a 2,000 share (2%) stock dividend

20,000* 2,000** 18,000

**

100,000 x 2% = 2000 x $10 = $20,000 2,000 x $1par = $2,000

B. Blance sheet before the stock dividend Quest, Inc. Balance Sheet (Stockholders Equity Section) December 31, 2008 Common stock - $1 par value 250,000 shares authorized 100,000 shares issued and outstanding Paid in capital in excess of par value Total paid in capital Retained earning Total stockholder equity $ 100,000 8,000 108,000 35,000 $143,000

C . Balance sheet after stock dividend Quest, Inc. Balance Sheet (Stockholders Equity Section) December 31, 2008 Common stock - $1 par value 250,000 shares authorized 100,000 shares issued and outstanding $ 100,000

Common stock dividend distributable, 2,000 shares Total common stock issued and to be issued Paid in capital in excess of par value Total Paid-in capital Retained earnings Total stockholder equity

2,000 102,000 26,000 128,000 15,000 $143,000

3. A company had 400,000 shares of $75 par value common stock, 10,000 shares of 5%, $25 par value cumulative preferred stock, and 30,000 shares of 5%, $10 par value noncumulative preferred stock outstanding during the year. Net income after taxes was $1,700,000. No dividends were declared during the year. Calculate EPS (Earning per Share) Answer :

4. Assume net income (after tax) of $500,000, cumulative convertible preferred stock dividends of $25,000, common stock outstanding of 50,000 shares, and a tax rate of 30%. The convertible preferred stock is convertible into 5,000 shares of common stock. Is the convertible preferred stock dilutive? Answer : EPS without conversion The preferred stock is converted, we would not have dividends and the number of shares of common stock would increase by 5,000 shares. There is not a tax effect. EPS after assumed conversion: S >Dilutive

5. 8% stock dividend declared Market price is $ 10 Equity: Common Stock ($ 1 par) Capital Surplus Retained Earnings Total

450,000 1,550,000 3,000,000 5,000,000

a) IF 5 for 1 stock split, what happens to equity accounts After 8% stock dividend declared Common Common stock ($1 par; 450,000 shares) $ 486,000 1) Additional paid-in capital 1,874,000 2) Retained Earnings 2,640,000 3) Total $5,000,000
1)

2)

3)

450,000 x 8% = 36 shares 36,000 shares x $1 = $ 36,000 $450,000 + $36,000 = $486,000 36,000 shares x ($10-$1 par) = $324,000 1,550,000 + $324,000 = $1,874,000 36,000 shares x $10 = $360,000 3,000,000 360,000 = $2,640,000

After 5-for-1 Stock Split Common stock ($0.2 par; 2,250,000) Additional paid-in capital Retained Earnings Total

$ 450,000 1,550,000 3,000,000 $5,000,000

b) If cash dividend of 50 cents per new share represents a 10% increase on last years dividend, what was last years dividend? o Dividends this year = $0.50 x 450,000 shares x 5/1 split = $1,125,000 o Last years dividend = $1,125,000/1.10 = $1,022,727.3 o Dividends per share last year = $1,022,727.3/450,000 shares = $2.27