Problem Set 4
1.
Determining Profit or Loss from an Investment. Three years ago, you purchased 150 shares of
IBM stock for $88 a share. Today, you
sold your IBM stock for $103 a share.
For this problem, ignore commissions that would be charged to buy and
sell your IBM shares.
a. What is the amount of profit you earned on
each share of IBM stock?
b. What is the total amount of profit for
your IBM investment?
2.
Calculating Rate of Return. Assume that at the beginning of the year,
you purchase an investment for
$8,000 that pays $100 annual income.
Also assume the investment’s value has decreased to $7,400 by the end of the
year.
a.
What
is the rate of return for this investment?
b.
Is
the rate of return a positive or negative number?
3.
Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As
a stockholder in Bozo Oil Company, you receive its annual report. In the
financial statements, the firm has reported assets of $9 million, liabilities
of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares
of common stock.
a. Calculate the
earnings per share of Bozo Oil’s common stock.
b. Assuming
that a share of Bozo Oil’s common stock has a market value of $40, what is the
firm’s price-earnings ratio?
c. Calculate the
book value of a share of Bozo Oil’s common stock.
4.
Determining Interest and Approximate Bond Value. Assume that three years
ago, you purchased a
corporate bond that pays 9.5 percent. The
purchase price was $1,000. Also assume that three years after your bond investment, comparable
bonds are paying 8 percent.
a. What
is the annual dollar amount of interest that you will receive from your bond
investment?
b. Assuming
that comparable bonds are paying 8 percent, what is the approximate dollar
price for which you could sell your bond?
c. In
your own words, explain why your bond increased or decreased in value.
5. Using Margin. Bill Campbell invested $4,000
and borrowed $4,000 to purchase shares in Wal-Mart. At the time of investment,
Wal-Mart was selling for $45 a share.
a. If
Bill paid $30 commission, how many shares could Bill buy if he used only his
own money and did not use margin?
b. If
Bill paid $50 commission, how many shares could Bill buy if he used his $4,000
and borrowed $4,000 on margin to buy Wal-Mart stock?
c. Assuming
that Bill did use margin, paid $90 commission to sell his stock, and sold his
Wal-Mart stock for $53, how much profit did he make on his Wal-Mart investment?
6. Calculating yields. Assume you purchased a
corporate bond at its current market price of $850 on January 2, 2002. It pays
9 percent interest and it will mature on December 31, 2011, at which time the
corporation will pay you the face value of $1,000.
a. Determine
the current yield on your bond investment at the time of purchase.
b. Determine
the yield to maturity on your bond investment.
