1.) You have just bought (on margin) 100 shares of IBM Corp. common stock for $1
ID: 2623320 • Letter: 1
Question
1.) You have just bought (on margin) 100 shares of IBM Corp. common stock for $108 per share. One
year fromnow you expect to sell the stock for $140. The interest charge will be 9%. What return do you
expect to earn on your investment? (Show all work. Ignore commissions.)
2.) Calculate the dividend yield on OPQ stock. Earnings per share are $2.75 and the quarterly
dividend is 25 cents. The book value is $15.20 per share while the market value is $25.00. (Show
all work.)
3.) You have the chance to buy either one of two bonds. The first is a tax-free municipal with a
coupon yield of 6.5%. The second is a corporate bond with a yield of 8.5%. Both bonds are rated AA.
Your tax rate is 28%. Which would you choose? (Show all work.)
Explanation / Answer
1)
Total Share Price of 100 Share @ $108 = 108 x 100 = 10800
Interest on holding the amount = 10800 x 9 = 972 100
Total Cost of the Shares for one year = 10800 + 972 = $11772
Selling price of the shares @ $140 = 140 x 100 = $14000
Total Return on the investment = 14000-11772 = $2228
Percentage Return = 2228 x 100 = 18.92 %
2)
The dividend is $1.00 per year. All you have to do is divide that by the market value 1/25 = 4 percent.
3)
For Tax Free municipal Corp Bond with Coupon Rate of 6.5 (if paid 100 per Share) = 6.5 x 100 = 6.5 100
For Corporate Bonds with Coupon Rate of 8.5 (if paid 100 per Share) = 8.5 x 100 = 8.5 100 Income Tax = 8.5 x 28 = 2.38 100 Net Income on Corporate Bonds = 8.5-2.38 = 6.12 Conclusion : Therefore we may see that return on municipal Corp Bond is More Therefore We may Choose the Tax Free Municipal Corp Bond with Coupon Rate 6.5
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