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Economics, money and banking

Economics, money and banking
Order Description
Answer 4 full questions out of the 6 offered in the attachment. answer with detail. Textbook used for course is the economics of money and banking and financial
markets by MISHKIN source that or nothing if possible.
passions for poetry and yoga. When he scores. he clasps his hands together and strikes a namaste pose.
“We see Arian as a unique. multidimensional individual. a trailblazer.“ said Mr. French. who added that
Fantex cold-called Mr. Foster‘s agent to pitch the idea.
Yet during the first six weeks ofthis season. Mr. Foster‘s production has flagged. He hasjust one rushing
touchdown. Heading into the year. there was concern over various injuries. Off the field. Foster admitted in a
documentary released in September that he potentially violated NCAA. rules by accepting money when he
was a college player.
Those issues underscore the risk of betting on Mr. Foster‘s brand. or that ofany professional athletes.
especially NFL. players. Unlike some other sports. N.F.L. contracts often are not fully guaranteed. meaning
players are often cut and forced to find a new team. sometimes for a lesser contract.
For investors. the long-term outlook for a player will be difficult to handicap. lf’a player‘s fortunes suffer and
the tracking stock declines. there will be no rescue financing from a private equity firm 7 or an investor like
Warren E. Buffett 7 to stabilize the share price.
And unlike a stockholder ofa public company. investors have no corporate govemance rights.
There are no plans to hold annual meetings with the athlete. or quarterly conference calls.
Despite all the risks. some football fans appear poised to buy in. As one tweeted on Thursday after reading the
news: “Wow. This is awesome.”
how it will trade.“ he said.
A graduate of West Point and Harvard Business School. Mr. French made a fortune during the dot-com boom
when. in 2000. he sold OnLink. a software company he founded. to Siebel Systems for about $600 million.
One ofhis Fantex co-founders. David M. Beirnc. was a general partner at Benchmark Capital. the venture
capital firm that was one ofeBay’s earliest investors.
Mr. French said Mr. Beirne conceived of the Fantex concept more than a decade ago when working on a
sports-related venture with John Elway. the former Denver Broncos quarterback.
“Fantex represents a powerful new opportunity for professional athletes. and I wish it were available during
my playing days.” Mr. Elway. a member of Fantex’s board. said in a statement.
Wall Street executives have also joined the company. Fantex‘s president is John Rodin. co-president of the
hedge fund Glenview Capital Management and a Goldman Sachs alumnus. lts chieftechnology officer is
Joshua S. Levine. a fonner senior executive at E*Trade and Deutsche Bank.
A big question is whether other athletes are on the sidelines awaiting a Fantex l.P.O. Mr. French declined to
discuss future deals.
On one hand. athletes and their agents could view Fantex as a compelling proposition. providing athletes with
a large upfront payment for giving up a certain percentage of their future earnings. Such a payment could act
as a hedge against an unexpected downturn in a player‘s career.
But advisers could counsel against trading a piece oftheir future earnings for a big lump sum. as some athletes
are notorious for squandering money.
Other considerations are the specter of insider trading violations. and complying with the federal securities
laws. Mr. Foster. his friends and his financial team will have to be especially circumspect when discussing
issues that might affect his earnings.
A fifth-year veteran from the University ofTennessee. Mr. Foster. 27. has led all running backs in rushing
touchdowns two of the last three seasons. while racking up well over 1.000 yards each year. In March 2012.
Houston signed Mr. Foster to a contract worth up to $43.5 million over five years. He has a handful of
endorsement contracts. including with Under Armour and Kroger Texas.
Half Mexican-American. half black. Mr. Foster is a crowd favorite and media darling who tmmpets his
passions for poetry and yoga. When he scores. he clasps his hands together and strikes a namaste pose.
“We see Arian as a unique. multidimensional individual. a trailblazer.“ said Mr. French. who added that
Fantex cold-called Mr. Foster’s agent to pitch the idea.
Yet during the first six weeks ofthis season. Mr. Foster‘s production has flagged. He hasjust one rushing
touchdown. Heading into the year. there was concern over various injuries. Off the field. Foster admitted in a
documentary released in September that he potentially violated NCAA. rules by accepting money when he
was a college player.
Those issues underscore the risk of betting on Mr. Foster‘s brand. or that of any professional athletes.
especially NFL. players. Unlike some other sports. NFL. contracts often are not fully guaranteed. meaning
players are often cut and forced to find a new team. sometimes for a lesser contract.
For investors. the long-tenn outlook for a player will be difficult to handicap. lfa player’s fortunes suffer and
the tracking stock declines. there will be no rescue financing from a private equity firm 7 or an investor like
Warren E. Buffett 7 to stabilize the share price.
And unlike a stockholder ofa public company. investors have no corporate govemance rights.
There are no plans to hold annual meetings with the athlete. or quarterly conference calls.
Despite all the risks. some football fans appear poised to buy in. As one tweeted on Thursday after reading the
After considering a number of possibilities for its inaugural initial public offering. the company found a
charismatic candidate in Arian Foster. the Pro Bowl running back ofthe Houston Texans. Investors in the deal
will receive stock linked to Mr. Foster‘s future earnings. which includes the value ofhis playing contracts.
corporate endorsements and appearance fees.
The company. Fantex Holdings. has grand ambitions beyond a Foster I.P.O. 7 it hopes to sign up more
football players and other athletes. as well as celebrities like pop singers and Hollywood actors.
But ifsuch an investment sounds speculative. that is because it is. In a filing for the Foster deal with securities
regulators. Fantex laid out 37 pages of risk factors. including a possible career-ending injury or a perfonnance
slump.
“You are potentially one hit away from losing your money.“ said Bradley Shear. a sports management
professor at George Washington University. “On any given Sunday. anything can happen to any player.”
Risks aside. the offering is intended to capitalize on the mammoth popularity ofthe National Football League
and fantasy football. where fans draft players and score points for touchdowns. yardage and other notable
plays during the season.
If thousands of fans are willing to pay as much as $250 for an Arian Fosterjersey. the thinking goes. why
wouldn’t they pay up for a few shares ofArian Foster stock?
Brian McCarthy. a spokesman for the N.F.L.. declined to comment on the deal.
A market of star athletes calls to mind other unusual investments tied to entertainers. In the late 199os. a
financier created Bowie Bonds. a small bond issue that paid interest from the current and future revenue 01.25
albums by the rock musician David Bowie. The brokerage firm Cantor Fitzgerald runs the Hollywood Stock
Exchange. a marketplace for bets on the fortunes of movies and their stars. but participants use only play
money.
Fantex wants its venture to be anything but make-believe. Investors can now register with the company and
soon place orders for the I.P.O. The company will market the I.P.O. in the coming weeks. offering 1.06
million shares at $10 a share. or $10.6 million worth of stock. If demand is insufficient. the company may
cancel the deal.
As for Mr. Foster. he will receive a $10 million payment from Fantex upon consummation ofthe offering.
(The balance of the I.P.O. covers the deal’s costs.) In exchange for the payment. Mr. Foster has promised to
pay Fantex 20 percent of his future earnings.
The company is effectively financing the $10 million payment to Mr. Foster by raising money from retail
investors in an I.P.O. In its filings. Fantex says it believes that the stock is intended to track the economic
performance of Mr. Foster‘s future brand income.
Still. shareholders will not have a direct investment in Mr. Foster or any control over his brand. The company
did say it expected to pay a dividend to holders ofthe Foster stock.
Shares will trade exclusively on an exchange operated by Fantex. The tracking stock will increase in value if
Mr. Foster raises his camings potential with standout play or increased sponsorships.
Then. the investor can try to sell his shares at a higher price. Fantex will make a 1 percent commission from
both the buyer and seller on the trades.
Buck French. the company’s co-founder and chief executive. demurred when asked to predict how the stock
might behave in a secondary market.
“We don‘t know how it will trade.” he said.
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2 of 5
5. (From old exam) Suppose ABC economy is in the midst ofa recession and market participants are
expecting GDP growth in ABC economy to be -S9v”&. in the previous quarter. It was announced yesterday
that GDP growth in ABC economy was -4‘?-“‘6 last quarter, which is the worst GDP growth in the post-war
period for this economy. Assume no other news comes out over the next couple ofweeks.
a. Graphically depict the path ofstock prices from. a week before the announcement to a week
after the announcement. Be sure to use your knowledge ofhow markets respond to news in
drawing the graph.
b. Hypothetically assume that the efficient markets hypothesis holds perfectly. On another graph,
draw the path for stock prices from a week before the announcement to a week after the
announcement in this case. Explain why your answer is different from part a) in this case.
6. (Similar to old exam) A new startup company, Fantex, plans to issue stock in Arian Foster (a 27 year old
football player). They are offering 1.06 million shares at $10 per share. Fantex plans to make dividend
payments. Arian Foster will receive a lump-sum payment of S 10 million after the stock issue and promises
to pay 20% ofhis future earnings to Fantex. The remainder $0.6 million will go to Fantex in fees. In
addition Fantex will charge a transaction fee for every purchase and sale ofthese shares in the secondary
market. For simplicity, assume that interest rates are expected to be 59%. over the lifetime ofthis stock.
NOTE. The article this question ms based on is copied at the eml ofthis file The students that semester had not
read the drift le. neither nus the article nu holed in the exam, You really inst need the first couple ofpuges oft/re
tll‘llt‘le’. The goal of the first part of the course is that you should he uhle to make sense ofaitieles like this and if
laced with u similar choice. he uhle to make informed decisions,
a. Clearly explain under what conditions it makes sense for Arian Foster to agree to this stock issue.
Please be as specific as you can.
b. Consider the Gordan Growth Model, for simplicity. Suppose you expect growth in Arian Foster’s
earnings, and hence your dividends, to be 5% per year. You perceive this stock as being relatively
risky and have a 25% required return on equity. What dividend payment for next year would imply
that the price of Arian Foster’s stock equaled your value for it?
If You Like a Star Athlete. Now You Can Buy a Share
By PETER L4 TTMAN and STE I’E EDER f II“ New York Times. October
Money and Banking
Recitation Questions and Homework Assignment #5 (Chapter 7)
Due on Mar 5 in the first ten minutes of recitation or by 4:5opm on NYU Classes
HOME‘V’ORK ASSIGNMENT: Hand in solutions to any FOUR (4) questions from the below.
1. IBX‘s stock dividend at the end of this year is expected to be $2.15. and it is expected to grow at l 1.2%
per year forever.
a. lfthe required rate of return on IBX stock is 15.2% per year. what is its intrinsic value
b. IfIBX‘s current market price is equal to this intrinsic value. what is next year‘s expected price?
c. If an investor were to buy IBX stock now and sell it after receiving the $2.15 dividend a year from
now. what is the expected capital gain (i.e. price appreciation) in percentage terms’.’ What would be
the holding period retum’.’
2. Computer stocks currently provide an expected rate of return of 16%. MBl. a large computer company.
will pay a year-end dividend of $2 per share.
a. lfthe stock is selling at $50 per share. what must be the market‘s expectation ofthe growth rate of
MB] dividends?
b. lfdividend growth forecasts for MB] are revised downward to 5% per year. what will happen to the
price of MB] stock’.’
3. ( From u/d exam) Use the Gordon Growth Model to answer the following questions.
a. Holding everything else constant. how would a decrease in dividends affect stock prices? Explain
b. At the peak ofthe recent financial crisis in the L’S. many investment banks and financial firms
announced an increase in retained earnings. These retained camings were used to build up the firm’s
capital (shareholders equity) cushions. The price of their stocks increased. How does this result
compare to your answer in part a)? Clearly explain why it is or is not the same.
4. (F mm old cram) Suppose that market participants were expecting GDP growth for Micronesia to be 4.5%
for the previous quarter. It wasjust announced that GDP growth for Micronesia turned out to be 4‘11; last
quarter. This was the highest GDP growth rate that Micronesia has had in the last 50 years.
a. Briefly explain what would happen to stock prices immediately after the announcement is made; as
well as over time assuming that no other information is released. Are all these changes consistent with
the efficient markets hypothesis? Why or why not.
b. On a graph. with time on the horizontal axis and stock prices in Micronesia on the vertical axis. depict
the path for stock prices from a few days prior to the announcement to a few weeks after the
announcement. Make sure to use your knowledge of how stock markets tend to respond to news.
Clearly indicate the announcement date on your graph.
5. (From old mum) Suppose ABC economy is in the midst ofa recession and market participants are
expecting GDP growth in ABC economy to be -S‘}~‘i» in the previous quarter. It was announced yesterday
that GDP growth in ABC economy was 4‘1”.) last quarter. which is the worst GDP growth in the post-war
period for this economy. Assume no other news comes out over the next couple of weeks.
3′ 7‘4_;_ .er
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