Fundamentals of Finance: Project Report

This project report covers various topics related to fundamentals of finance such as rights and advantages of shareholders, industry average performance and comparison, difference and similarities between common and preferred stock, calculation of stock return and price, value of Safeco stock, P/E model computation and more.

Running Head: Fundamentals of Finance
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Project Report: Fundamentals of Finance

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Contents
Question 1.........................................................................................................................3
i. Rights and advantages of shareholders......................................................................3
ii. Disadvantages of owning stock................................................................................3
Question 2.........................................................................................................................3
i. Industry average performance and comparison.........................................................3
ii. Industry average performance and comparison........................................................4
Question 3.........................................................................................................................4
i. Difference between common and preferred stock.....................................................4
ii. Similarities between common and preferred stock..................................................4
Question 4.........................................................................................................................4
i. Calculation of stock return........................................................................................4
ii. Three most recognized indices in US market...........................................................4
Question 5.........................................................................................................................5
i. Calculation of stock price..........................................................................................5
ii. Traditional full service broker..................................................................................5
Question 6.........................................................................................................................5
i. Calculation of value of Safeco stock.........................................................................5
ii. Calculation of value of Safeco stock........................................................................5
Question 7.........................................................................................................................6
i. Value of stock............................................................................................................6
ii. Why the growth rate is 0?.........................................................................................6
Question 8.........................................................................................................................6
i. Calculation of stock price..........................................................................................6

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ii. P/E model computation............................................................................................6
References.........................................................................................................................7

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Question 1:
i. Rights and advantages of shareholders:
Shareholders are a person, institution or a company which owns at least one share of a
company. Shareholders have many advantages and rights. Following are few rights of the
shareholders:
 Right to share the profit of the company
 Right to influence the management of the company
 Right to buy new shares
 Right to vote
 Right to sue the company for wrongful act (Cornett, Adair & Nofsinger, 2016)
Further, following are few advantages of the company:
 Stock appreciation
 Decision making
 Dividends
 Special discounts
ii. Disadvantages of owning stock:
Further, there are few disadvantages of owning the stocks. Few of them are as follows:
 Brokerage commission reduces the profit margin level
 Volatile investment
 Time consuming
 Huge risk (Kudo, Jae Ko, Walker & Connaughton, 2015)
Question 2:
i. Industry average performance and comparison:
The standard and poor’s 500 index takes the concern of market capitalization of top 500
companies. Market capitalization is the total firm size which is measured by multiplying the
stock price and number of shares outstanding. On the other hand, Dow Jones industrial

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average takes the concern of entire market. Thus, standard and poor’5 500 index is better
measurement than Dow Jones industrial average.
ii. Industry average performance and comparison:
Dow Jones industrial average is more popular than standard and poor’s 500 indexes as
it has been started in 1884. At that time, only 11 stocks have been evaluated but with the
time, top 30 companies of market have been evaluated to measure the stock value of U.S.
equities.
Question 3:
i. Difference between common and preferred stock:
Preferred stock and common stocks are main types of stock which is sold by the
organizations and traded in an open market. Common stock offers different dividends
whereas preferred stock offers same dividend to the stock holders. Common stocks are the
part of market capital whereas preferred stocks are sold by the company to raise a long term
loan for fixed term (Laboissiere, Fernandes & Lage, 2015).
ii. Similarities between common and preferred stock:
Further, preferred stock and common stocks are quite similar in some terms such as
both the stock offers high return investment to the stockholders. Both the investment is quite
dangerous as the situated risk is quite higher. Common stocks as well as preferred stock, both
offer the dividend to the stockholders of the company.
Question 4:
i. Calculation of stock return:
Calculation of Stock Return
Previous stock price 22,370.80
Current stock price 22412.59
Calculation of Return (Current
stock price - previous stock
price)/ Previous stock price 0.1868%
ii. Three most recognized indices in US market:

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Various indices are there in the US market. Some of them are as follows:
 S&P Global 100
 BBC Global 20
 FTSE
Question 5:
i. Calculation of stock price:
Calculation of total amount to buy shares
Total number of shares 300.00
Stock price
$
42.62
Brokerage cost
$
9.50
Total amount required (Stock price *
number of shares) + brokerage cost
$
12,795.50
ii. Traditional full service broker:
According to the above calculations, it has been found that the full service broker was
used by the investor.
Question 6:
i. Calculation of value of Safeco stock:
Value of Safeco's Stock
Recent dividend $ 0.88
Growth rate 8%
Required return 10%
Stock value= Dividend (1+ growth rate)/
Required return - growth rate $ 47.52
ii. Calculation of value of Safeco stock:
Value of Safeco's Stock
Recent dividend

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$ 0.88
Growth rate 8%
Required return 10%
Increment in growth rate 1%
Stock value= Dividend (1+ increment in growth
rate)/ Required return - growth increment in price $ 44.50
Question 7:
i. Value of stock
Value of Preferred Stock
Recent dividend
$
3.55
Required return 7.7%
Stock value= Dividend / Required rate of
return
$
46.10
(Barberis, Greenwood, Jin & Shleifer, 2015)
ii. Why the growth rate is 0?
The growth rate of the preferred stock is 0 because dividend amount has not been
changed in current year from last year.
Question 8:
i. Calculation of stock price:
Calculation of Stock Price
Earnings per share $ 1.56
P/E ratio 42.48
Stock value= Price earnings ratio * earnings
per share $ 66.27
ii. P/E model computation:
P/E model helps the company and the financial analyst to calculate the market price of
the stock so that it becomes easy to calculate the stock performance of the company.

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References:
Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative
capital asset pricing model. Journal of financial economics, 115(1), 1-24.
Cornett, M. M., Adair, T. A., & Nofsinger J. (2016).M: Finance(3rd ed.). New York, NY:
McGraw-Hill.
Kudo, M., Jae Ko, Y., Walker, M., & Connaughton, D. P. (2015). The influence of title
sponsorships in sports events on stock price returns. International Journal of Sports
Marketing and Sponsorship, 16(2), 37-56.
Laboissiere, L. A., Fernandes, R. A., & Lage, G. G. (2015). Maximum and minimum stock
price forecasting of Brazilian power distribution companies based on artificial neural
networks. Applied Soft Computing, 35, 66-74.