Willy Wise participates in his employer\'s 401(k) retirement plan and contribute

Question

Willy Wise participates in his employer's 401(k) retirement plan and contributes $4000 in the course of the year out of his $60,000 income. (His employer matches Willy's contribution dollar for dollar.) Willy's contributions are tax deductible (i.e., deducted from his taxable income) and he is in the 25% federal income tax bracket. How much less does Willy pay in federal income taxes that year compared to a co-worker who makes the same salary but does not participate in the 401(k) plan?

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Question 372 pts

Imagine that stock in Company XYZ is selling for $40 per share. There are a million shares of stock, and Company XYZ made $2 million in profits last year. What is its P/E ratio?

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Question 382 pts

Last year, you purchased a 20-year bond from a snack food company -- let's call it Couch Potato -- with a face value of $1000 and an interest rate of 6% per year. This year, new bonds sold by other snack food companies with similar risk characteristics to Couch Potato are currently offering only 4% interest per year. What will be the approximate value at which you could sell your Couch Potato bond today? (This is a concept question; you should be able to estimate the answer without doing the exact calculation.)

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Question 392 pts

Nathan buys several shares of ABC Corp. stock for $60 each. At the end of one year, the stock price has risen to $66. Plus he was paid a dividend of $3 per share. What is the approximate rate of return (or yield) on this investment for the year. (You can ignore any commissions or taxes.) Remember: the rate of return is the total return as a percentage of your initial investment.

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Question 402 pts

Think of a $1,000 bond with a 6% ($60) coupon that matures several years into the future. If you manage to buy it for $850, the bond's CURRENT yield is approximately:

Explanation / Answer

Question 372). Answer :- Option c). 20

Explanation :- Earnings per share = Net income / Number of shares of stock

= 2 Million / 1 Million

= $ 2 per share.

Price earnings (P/E) ratio = Market price per share / Earnings per share.

= 40 / 2

= $ 20. (Option c).

Question 382). Answer :- Option D). $ 1250.

Explanation :- Calculation of price at which the bond can be sold today :-

= 1000 * 6 % * [ 1 - (1 + 0.04)-20 ] / 0.04 + 1000 / (1 + 0.04)20

= 60 * [ 1 - (1.04)-20 ] / 0.04 + 1000 / (1.04)20

= 60 * [ 1 - 0.456 ] / 0.04 + 1000 / 2.1911

= 60 * 0.544 / 0.04 + 456.39

= 60 * 13.60 + 456.39

= 816 + 456.39

= $ 1272.39 (Most nearest to the $ 1250 mentioned in the option D to the above given question).

Question 392). Answer :- Option D). 15 percent.

Explanation :- Rate of return on investment (Yield on investment) = [ (66 - 60) + 3 ] / 60

= [ 6 + 3 ] / 60

= 9 / 60

= 0.15 i.e., 15 percent. (Option D).

Question 402). Answer :- Option D). 7 %

Explanation :- Current yield on bond = Annual coupon on bond / Current price of bond.

= 60 / 850

= 0.07 i.e., 7 % (Option D)

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