Problem Set 4 Solution
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.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more