Fundamentals of Finance: Stocks Valuation Assignment - BUS-FP3062

This assignment delves into the fundamentals of stock valuation within the context of a finance course, likely at the university level. It explores key concepts such as the rights and advantages of shareholders, differentiating between common and preferred stocks, and understanding major stock market indexes like the Dow Jones Industrial Average and the S&P 500. The assignment includes calculations for total stock return, the amount needed to purchase shares, and the value of stocks using various models, including zero growth and P/E ratio. The student demonstrates an understanding of financial principles through problem-solving and answering questions related to the stock market and corporate finance.

Running head: FUNDAMENTALS OF FINANCE
Fundamentals of finance
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Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................3
Question 8........................................................................................................................................4
Question 9........................................................................................................................................4
Question 10......................................................................................................................................4
Question 11......................................................................................................................................5
Question 12......................................................................................................................................5
Reference.........................................................................................................................................6

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Question 1
Rights and advantages for shareholders
Common shareholders are considered as the owners of the entity and hence have
particular privileges as well as rights those are governed through laws that prevails in the state in
which the entity operates. Most crucial rights the shareholders have include right in sharing the
entity’s profitability, assets and earnings, level of control and influence on the decision taken by
the management (Gregg, 2017). Various advantages available to shareholders are as follows –
 Stock appreciation – major advantage of buying the stock is that stock has potential of
appreciating over the period of time. Further, the shareholder may offer the stock for
sale at any time (Pearce, 2015).
 Dividends – it is periodic payment that is provided by some of the entities to its
shareholders based on the profits of the entity. Stocks that pay dividends may provide
steady source for earning for the shareholders without requiring them to sell or buy the
shares and presents alternative to money saving for interest bearing accounts as well as
buying bonds.
 Decision making – another advantage is shareholder is able to influence the decision in
entity that issues the stock that can affect the share’s value.
 Other benefits – entities those issue the stocks may allow the shareholders different
other benefits. For instance, shareholders can be granted special discounts for the
products as well as service those are offered by the entity. Particular benefits for the
shareholders changes from one entity to another (Pearce, 2015).
Question 2
Standard and Poor’s 500 and Dow Jones Industrial average both indices track particular
entities for creating overall picture of stock market. It assists he investors to understand present
state of the American economy. Major difference among them is in the number of holdings as
well as the methodology for weighing (Auer & Schuhmacher, 2015). Other differences are –
 Dow jones average is generally industrial component of series for averages that is
compiled by entities that publishes Wall Street Journal. Industrial average at present has
30 stocks. Conversely, S&P is specialized in reporting in context of activities and issues

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related to stock market. It has various stock components including energy, industrial,
utilities, healthcare and telecommunication. It is the index for market capitalization price
for the stock times, number of the shares outstanding so that the total value of entity and
not only the stock price will have the impact on the index (Goetzel et al., 2016)
 Dow jones founder started it with 12 stocks in 1896 on NYSE. The same was expanded
to 20 stocks in 1916 and 30 in 1928. However among the original 12 only general electric
still remains. Conversely, S&P stocks are segregated into 3 sections. Top 3rd has 166
stocks that accounts for 75% of overall index.
 As S&P 500 includes more stocks, generally S&P is considered as better indicator for
overall activity of the market. Further it encompasses wide variety of the business sectors
whereas Dow Jones is limited in context of the industrial issues (Goetzel et al., 2016).
Question 3
Common stock provides the investors partial ownership in the entity. However, number
of entities issue common stock exclusively to the investors. Investors those are holding the
common stock generally have legal right for voting to name board of director’s representatives
and approving crucial corporate decisions like mergers. They are further entitled to receive
dividends if any declared by the entity on shares (Smith, 2015).
Conversely, preferred stocks have common characteristics of bond as the same has set
amount that can be paid by the entity to its preferred shareholders for redeeming the shares. Most
of the preferred stocks make payment for dividends and amount of dividend is usually greater
than the amount received by common shareholders. Usually the preferred stock pays fixed
amount of dividend in year (Loviscek, 2017).

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Question 8
Total Stock Return = [(P1– P0) + D] / P0
Where P0 = Initial Stock Price
P1 = Ending Stock Price
D = Dividends
Average for June 4th(P1) = 13,598.14
Average for June 3rd(P0) = 13,449.28
Dividends = 0
Hence,
Total Stock Return for June 4th = [(13,598.14–13,449.28)+0]/13,449.28= 0.01107
Converting to percentage = 0.01107 * 100= 1.1068%
Question 9
Amounts required for buying 150 shares= (trading amount per share * number of shares) + price
per stock trade
Cost per stock at brokerage firm= $0.10
Trading price = $18.22
Number of shares = 150
Amount required = ($18.22 * 150) + $0.10
= $2733.00 + $0.10
= $2733.10
Question 10
Value of the stock = D1 / (k – g)

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D1 = Dividend next year = $1.18
k = Cost of Capital = 12%
g = Growth Rate = 10%
Value of the Hi-tech stock = 1.18 / (0.12 - 0.10) = $59.00
Question 11
Zero Growth: P0= D0/ R
Where D0 = Dividend,
R = Discount rate of return
P0 = $1.20 / 4.5%
= $1.20 / 0.045
= $26.6666 = $26.67
Question 12
P/E ratio = price per share ÷ earnings per share (EPS)
Hence, Price per Share = P/E ratio * Earnings per share (EPS)
EPS= $1.82
P/E= $31.54
Stock price = 31.54 * $1.82 = $57.40

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Reference
Auer, B. R., & Schuhmacher, F. (2015). Liquid betting against beta in Dow Jones Industrial
Average stocks. Financial Analysts Journal, 71(6), 30-43.
Goetzel, R. Z., Fabius, R., Fabius, D., Roemer, E. C., Thornton, N., Kelly, R. K., & Pelletier, K.
R. (2016). The stock performance of C. Everett Koop award winners compared with the
Standard & Poor's 500 Index. Journal of occupational and environmental
medicine, 58(1), 9.
Gregg, A. G. (2017). Shareholder rights and share capital: the effect of the 1901 Russian
Corporation Reform, 1890–1905. The Economic History Review, 70(3), 919-943.
Loviscek, A. L. (2017). Should Preferred Stock Funds Be Included in MutualFund
Portfolios?. The Journal of Wealth Management, 20(1), 83-96.
Pearce, J. A. (2015). The rights of shareholders in authorizing corporate philanthropy. Vill. L.
Rev., 60, 251.
Smith, E. L. (2015). Common stocks as long term investments. Pickle Partners Publishing.