Question

Suppose Sam would like to use $6,000 of his savings to make a financial investment. One way of making a financial investment is to purchase stock or bonds from a private company. Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab—a practice known as finance. Buying a share of RoboTroid stock would give Sam the firm. In the event that RoboTroid runs into financial difficulty, it will be paid first. Suppose Sam decides to buy 100 shares of RoboTroid stock.
Which of the following statements are correct? Check all that apply.

a. The price of his shares will rise if RoboTroid issues additional shares of stock. b. RoboTroid earns revenue when Sam purchases 100 shares, even if he
purchases them from an existing shareholder.
c. Expectations of a recession that will reduce economy-wide corporate profits
will likely cause the value of Sam's shares to decline.
d. Alternatively, Sam could make a financial investment by purchasing bonds
issued by the U.S. government.
e. Assuming that everything else is equal, a U.S. government bond that matures 30 years from now most likely pays an interest rate than a U.S. government bond that matures 10 years from now.

Answer 1

Answer:

The correct options are option C and Option D.

Explanation:

Lets look at each option in turn and evaluate whether they are correct or incorrect

Option A: Incorrect. This can be understood by thinking in terms of the classic demand and supply of a given item. If the company issues more shares, there will be a greater amount of shares in the market for a potential investor to buy. This additional supply of shares will put a downward pressure on the price of the shares which will cause the share price to decrease.

Option B: Incorrect. When a company issues shares to raise money, it is known as equity finance. By doing so, the company is increasing its capital which is recorded in the balance sheet under the heading of "share capital". Another statement that will be impacted is the cash flow statement under the heading of cash flow from financing activity. The income statement will not be impacted. If Sam purchases shares from another investor, the company's statements will not be impacted.

Option C: Correct. Expectations of a recession that reduce corporate profits for make investors expect a lower return on investment if they invest in a corporation's shares. This will dampen the demand, thereby decreasing the price.

Option D: Correct. An investor measures the opportunity cost of an investment by generally comparing it to the risk free return that they can get on US bonds. So the investor can alternatively invest in US govt instruments.

Option E: Incorrect. A bond maturing 30 years from now will carry a DIFFERENT interest rate due to the varying tenor. The tenor of a bond affects the risk profile of an investment in the bond which makes bonds of differing maturities offer different returns in line with expectations concerning economic performance.