Chapter 10

1. Describe the major differences between common stock and preferred stock.
Common stock has no special dividend rights and the lowest priority claim if the
company goes bankrupt. Owners of preferred stock, in contrast , usually receive
preferential treatment over common stockholders when it comes to receiving
dividends or cash payoffs in bankruptcy.
2. Why are convertible securities more attractive to investors than simply holding a
firms preferred stock or corporate bonds?
Convertible securities both increase in value with rising stock prices and provide the
fixed income and security of bonds, they are popular with investors, who are usually
willing to pay more acquire convertible debt than conventional issued by the same
corporation. From the corporations perspective, convertible bonds provide a means
by which the corporation issue debt and alter convert it to a equity at a price per
share that exceeds the stocks present market value.
6. Explain why investors look at a stocks P/E ratio rather than its price to determine
if the stock is cheap or expensive
First, a P/E ratio is a ratio of market price per share to earnings per share. The P/E is
used to judge how expensive a stock is. This determines the value for the stock
instead of just the market price. A cheap stock may have a higher chance of
defaulting but also making a lot of money. A expensive stock may be a safe stock as
well as high earning one. It really all just depends on the ratio.
9. Explain the differences among a market order, limit order, stop loss order, and
stop buy order.
Market Order- An order to buy or sell at the best price available at the time the
order reaches the exchange.
Limit Order- An order to buy or sell at a designated price or any better price.
Stop Loss Order- An investors order that sells a stock only if the price drops below
the market price to a certain level. The order locks in the profits that have already
been made to limit losses.
Stop Buy Order- An investors order that sells a stock only if the price rises above to
market price to a certain level. The order is designed to protect profits that have
already been made or limit losses in a short sell.
11. Val believes the price of ABC is too high at $35/share. She shorts 100 shares. A
week later, when she covers her short position, the price is $32/share. How much
money did Val make?

35-32= 3 x 100= $300

13. Dolezilek Power Company promises to maintain dividends of $5 per share on its
preferred stock, indefinitely. The stock currently sells at $37.50 per share. What is
the required return on the stock?
$5/37.50= 0. 1333= 13%

`15. You purchase 100 shares of Adams Trading Company stock today for $22.50
per share. At the end of one year, you collect a dividend of $2.75 and then sell the
stock at $24.50 per share. What is your total return on the stock? What is the
dividend yield? What is the capital gains yield?
Total Return on Stock= (24.50-22.50) + 2.75 / 22.50= .211 x 100= 21.11= 21%
return per stock and .75 x 100= $75 total profit
Dividend Yield= 2.75/ 22.50= .1222= 12%
Capital Gains Yield= 24.50-22.50/ 22.50= 0.088889= 9% yield

18. Explain the difference between systematic and unsystematic risk. Explain how
beta captures systematic risk.
Systematic risk is also known as market risk or nondiversifiable risk, being the risk
that tends to affect the entire market in a similar fashion. Unsystematic risk is the
unique or security-specific risks that tend to partially offset one other in a portfolio.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. In other words, beta gives a sense of a stocks
market risk compared to the greater market.