Lecture Practical business math procedures (11/e) - Chapter 21: Stocks, bonds, and mutual funds

After studying this chapter you will be able to: Read, calculate, and explain stock quotations; calculate dividends of preferred and common stocks; calculate return on investment; read, calculate, and explain bond quotations; compare bond yields to bond premiums and discounts; explain and calculate net asset and mutual fund commissions; read and explain mutual fund quotations.

STOCKS, BONDS, AND

MUTUAL FUNDS

Chapter Twenty One

1. Read, calculate, and explain stock quotations.

2. Calculate dividends of preferred and common stocks; calculate return

on investment

LU21-1: Stocks

Learning unit objectives

LU 21-2: Bonds

1. Read, calculate, and explain bond quotations

2. Compare bond yields to bond premiums and

discounts

1. Explain and calculate net asset and mutual fund

commissions

2. Read and explain mutual fund quotations

LU 21-3: Mutual Funds

Cumulative preferred stock –

entitles its owners to a specific amount of dividends in 1 year

Stock –

shares of ownership in a

company

Common stock –

stock that allows owners to have

voting rights

Stocks

Preferred stock –

does not allow voting rights, but

gives preference over common

stockholders in dividends

Dividends –

payments to shareholders

from profit

Dividends in arrears -

payments owed to cumulative preferred shareholders

Stockholders

Elect

Board of Directors

Elect

Officers of Corporation

How Stocks Are Traded?

Stockbrokers –

People who buy and sell stock on the floor of the exchanges; they charge a commission for trading

stocks

Stock exchanges –

an orderly trading place for

stock

Stock Quotations in Newspapers

Closing price per share of stock Annual earnings per share

Earnings per share = Annual earnings

Total number of shares outstanding

Stock Quotation Calculations

Annual dividend per share $1.21 Today’s closing price per share $39.09

*Earnings per share are not listed on the stock quote.

Stock yield = = = 3.1%

PE Ratio = = $39.09$2.30 = 17

Dividends on Preferred and Common

Stock

The stock records of Jason Corporation show the following:

Preferred stock issued: 20,000 shares In 2014, Jason paid no dividends Preferred stock cumulative at $.80 per share.In 2015, Jason paid $512,000 in

dividends

Common stock issued: 400,000 shares

2014 Dividends paid 0

Preferred stockholders

Paid: 0

Owe: 20,000 x $.80 =

$16,000

Common Stockholders 0

2015 Dividends paid $512,000 Paid for 2014 16,000

Paid for 2015 16,000

32,000 Total dividend 512,000 Paid preferred for ‘14 & ’15 -32,000 Common Stockholders $480,000

Return on Investment

Suppose you bought 200 shares of General Mills stock at $39.09 and sold them 1 year later at $41.10 With a 1% commission rate buying and selling the stock and

a current $1.21 dividend per share in effect, what was your return on investment?

Bought

200 shares at $39.09 = $7,818.00

Commission at 1% = 78.18

Total cost $7,896.18

Sold

200 shares at $41.10 = $8,220 Commission at 1% = - 82.20 Total cost $8,137.80

Total receipt $8,137.80

Total cost -7,896.18

Net Gain $241.62

Dividends + 242.00(200 x $1.21)

Total Gain $483.62

$ 483.62

$7,896.18 6.12% rate of return

Bond Quotations in Newspapers

Bond Quotations in Newspapers

= 5.7%

= 5.69%

Yearly interest:

Cost of bond:

(.0565 x $1,000) (.9959 x $1,000)

=

$56.50

$995.90

=

Calculating Bond Yields

Bond yield =

Jim Smith bought 5 bonds of Coke at the closing price of 99.59 What is Jim’s

interest? (Remember that in dollars 99.59 is $995.90.)

$282.50

$ 4979.50

Total annual interest of bond Total current cost of bond at closing

5 bonds x $56.50 interest per bond per year

5 x $995.90 = = 5.7%

Example:

Why Investors Choose

Mutual Funds

Diversification

Liquidity Low fund expenses Access to foreign markets Professional management

Net Asset Value

NAV = Current market value of fund’s investment Current liabilities

Net asset value (NAV) – the dollar value of one mutual fund share

Mutual fund –

a portfolio of stocks and/or bonds

Commissions: Mutual Funds

Classification Commission charge Offer price to buy

(Buy directly from investment company)

(Buy directly from investment company or from a

broker)

NAV + commission

%

(Buy from a broker)

Mutual Fund Quotations in Newspapers

FUND Net YTD 3-Yr

NAME NAV Chg % Ret % Ret

Grln P 13.82 -0.06 8.9 71.6

• NAV plus the sales commission

• Net Chg >Changes in NAV versus the previous