- Suppose a firm was expanding its operation by building a new factory and equipping it with the latest machinery.This expansion would require the firm to issue $150,000,000 worth of new shares of stock to finance.
- What are the financial assets and real assets in this transaction?
- Who would the firm employ to issue the new shares?Why?
- Is this issuance of shares a primary or secondary market transaction? How would the firm know how many shares it would need to issue to raise the needed funds?
- How would a lack of efficient financial markets hinder this firms ability to expand their operations?
- Given the following table:
- How many share of Rockwell could you purchase with $25,000?
- What would be your annual dividend income from those shares?
- What is the firm’s current earnings per share (EPS)?
- What was the firm’s closing price yesterday?
- Why would an investor want to buy/sell puts or calls?When would each of them have value and when would they have no value?
- Buy put
- Sell put
- Buy call
- Sell call
a. In this case, the financial assets would be shares and the real assets would be machinery and factory.
b. The firm may employ merchant bankers or investment bankers or lead manager to issue new shares since they have an expertise in this area of operation.
c. This is a primary market transaction. The number of shares the firm has to issue depends on the issue price of the share, which inturn depends on the market price of similar companies shares in the same industry.
d. If there is a lack of efficient financial markets, then the firm will not be able to get a fair price for it’s shares or enough buyers at fair price, hence the company may not be able to get the required funds which may hinder it’s ability to expand.
Puts and calls are highly leveraged instruments. Hence the investment is less while the gain is more than investing in a share. They also let investors hedge their positions in the equity market and diversify the stock portfolio. Puts are bought when the investor is bearish about the stock while calls are bought when the investor is bullish about the stock. An investor will sell a put option if he feels the stock price will be higher than the strike price of the underlying asset. Thus the price of the option will be his profit. Similarly an investor will sell a call option if he feels the stock price will be lower than the strike price of the underlying asset. So the call option is out of value and will not be exercised and the call writer will gain the price of the option.
Intrinsic value of put option= Strike price- underlying price
Intrinsic value of call option= Underlying price- Strike price
Buy put: It has value when the strike price is greater than the current price of the underlying asset while it has no value if the underlying price is more than the strike price.
Sell put: It has value when the underlying price is greater than the strike price and no value if strike price is greater than the underlying price.
Buy call: It has value when the underlying price is greater than the strike price and no value when underlying price is less than the strike price.
Sell call: It has value when the strike price is greater than the current price of the underlying asset while it has no value if the underlying price is more than the strike price.
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