**Problem Set 4 Solution**

**Personal Finance **

**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.

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