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....