1 Business Math Chapter 21: Stocks and Bonds

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Stocks Read stock listings Calculate and distribute dividends

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 3 Stock: the distribution of ownership of a corporation. Partial ownership can be purchased through various stock markets. Share: one unit of ownership of a corporation. Face value (par value): the value of one share of stock at the time the company first issued stock for sale. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 4 Stock certificate: a certificate of ownership of stock issued to the buyer. Dividend: a portion of the profit of a company that is periodically distributed to the stockholders of a company. Preferred stock: a type of stock that guarantees a specific dividend to the stockholder. The preferred stockholder does not have voting rights. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 5 Common stock: a type of stock that gives the stockholder voting rights. After dividends are paid to preferred stockholders, the remaining dividends are distributed among common stockholders. Stock market: the structure for buying and selling stock. Trade: either the buying or selling of a stock. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 6 Stockbroker: the person who handles the trading of stock. A stockbroker receives a commission for these services. Stock listings: information about the price of a share of stock and some historical information that is published in newspapers and on the Internet. Price-earning (PE) ratio: the ratio of closing price of a share of stock to the annual earnings per share. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Read stock listings There are eleven (11) columns across the top of the page and they identify specific information related to a particular stock. Stock prices are listed in dollars and cents. Positive and negative signs show the direction of the stock: “+0.13” means the stock went up thirteen cents over the previous day’s price. The rows list the stock name in alphabetical order.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 8 Identify each column 1: identifies the 52-week high 2: identifies the 52-week low 3: stock name 4: shows the dividend paid per share of stock the previous year 5: Yld% shows the previous year’s dividend as a percent of the current price per share. (If there was no dividend paid the previous year, the entry is “…”)

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 9 6: shows the stock’s price earnings ratio (PE) 7: Sales 100s shows the volume (number) of hundreds of shares traded this day. 8, 9 and 10: show the high, low and last price at which the stock was traded this day. 11: how much this day’s closing price per share differs from the previous day’s closing price per share for that stock. Identify each column

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 10 Look at this table

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Calculate and distribute dividends Corporation’s board of directors votes to reinvest any profits into a business or can declare a dividend with some or all of the profits. Dividend can be expressed as a percentage of the par value of the shares, or as a dollar amount per share. Usually declared quarterly.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 12 Key Terms Participating preferred stock: a type of preferred stock that allows stockholders to receive additional dividends if the company does well. Convertible preferred stock: a stock option that allows the stockholder to exchange the stock for a certain number of shares of common stock.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 13 Cumulative preferred stock: preferred stock that earns dividends every year. Dividends in arrears: dividends that were not paid in a previous year and must be paid to cumulative preferred stockholders before dividends can be distributed to other stockholders. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 14 How to calculate and distribute dividends 1.First pay dividends in arrears: a) Multiply the number of shares held by preferred stockholders by the given rate, expressed as dollars per share. b) Subtract those dividends in arrears from the available amount of money (continued next slide)

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 15 Calculate and distribute dividends 2.Pay the present year’s preferred stock dividends: a) Multiply the number of preferred shares held by stockholders by the given rate. b) Subtract these preferred stock dividends from the difference from step 1b. (continued on next slide)

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 16 Finally… 3. Pay the common stock dividend: Divide the difference from step 2b by the number of common shares held by stockholders. This is the dividend per share paid to common stockholders.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 17 Look at this example Your company has issued 20,000 shares of cumulative preferred stock that will earn dividends at $0.60 per share, and 100,000 shares of common stock. Last year, you paid no dividends. This year, $250,000 is available for dividends. How are the dividends to be distributed? (next slide)

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 18 Pay the stockholders 1.Pay last year’s dividends in arrears: 20,000 x $0.60 = $12,000 (to preferred stockholders) 2.Pay preferred stockholders for this year: 20,000 x $0.60 = $12,000 3.The remaining amount ($226,000) is divided among the 100,000 shares of common stock yielding a payout of $2.26 per share. Preferred stockholders receive $24,000 and common stockholders receive $226,000.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 19 Try this example The Puffer Fish Company has issued 10,000 shares of cumulative preferred stock that will earn dividends of $0.80 per share and 50,000 shares of common stock. Last year they paid no dividends. This year $100,000 is available for dividends. How are the dividends to be distributed? Preferred stockholders will receive $16,000 Common stockholders will receive $84,000; $1.68 per share

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Bonds and Mutual Funds Read bond listings Calculate the price of bonds Read mutual fund listings

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 21 Bond: a type of loan to the issuer to raise money for a company or municipality. The investor or bondholder will be paid a specified rate of interest each year and will be paid the entire value of the bond at maturity. Face value (par value): the original value of a bond, usually $1,000. Maturity date: the date at which the face value of the bond is paid to the bondholder. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 22 Junk bonds: high-risk bonds that are usually from companies in bankruptcy or in financial difficulty. Corporate bonds: bonds issued by a business. Municipal bonds: bonds issued by local and state governments. Treasury bonds: bonds issued by the federal government. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 23 Coupon bonds: bonds that require the investor to submit a coupon at a specified time to receive interest. Registered bonds: investors receive interest automatically by being listed with the company. Convertible bonds: bonds with a provision for being converted to stock. Callable bonds: bonds that can be repurchased by the company before the maturity date. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 24 Bond market: the structure for buying and selling bonds. Premium bond: a bond that sells for more than the face value. Discount bond: a bond that sells for less than the face value. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Read bond listings Less activity in the bond market; prices are given weekly. CLS: closing price  100% means bonds selling at par value  Discount bonds have a listing of less than 100%  Premium bonds have a listing of greater than 100%

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 26 How to read bond listings Nine columns in all Columns 1 and 2 give the high and low values over the past twelve months. Column 3 tells the name of the issuing company, the annual interest rate (expressed as percent of face value) and the last two digits of the year of maturity. Column 4 (Cur Yld) tells the current yield which is the ratio of the annual interest earned per bond and the current price per bond.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 27 Read bond listings Column 5 (Vol) tells the number of bonds traded in exact numbers (i.e. not 100s) Columns 6 and 7 give the weekly high and low values. Column 8 (Cls) tells the closing price per bond as a percent of the face value per bond. Column 9 (Chg) tells how much this week’s closing price per bond differs from the previous week’s closing price per bond.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 28 Table 21-2

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Calculate the price of bonds Locate the percent of $1,000 that the bond was selling for at the close of the week (column 8). Multiply the decimal equivalent of the percent by $1,000. Round the product to the nearest cent.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 30 Yield: a measure of the profitability of the investment. Current bond yield or average bond yield: the annual interest per bond to the current price per bond. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 31 Look at this example Calculate the closing price of BellSo bond. From column 8, the closing price as a percent of face value was 104 ⅝ which is equal to % or Closing bond price = $1,000 x The closing bond price is $1,046.25

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved Read mutual fund listings 1.Find the appropriate fund family (bold entry in column 1) 2.Find the appropriate fund name (indented entry in column 1) 3.Find the net asset value (NAV) in column 2 4.Identify the one-day total return (Dly % Ret) from Column 3. 5.Identify the total return for the year to date (YTD % Ret) from Column 4.

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 33 Portfolio: a variety of types of investments Mutual fund or investment trust: a collection of stocks, bonds, and other securities that is managed by a mutual fund company Net asset value: the value of one share of the fund. This value fluctuates just as the value of stocks and bonds fluctuates. Key Terms

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 34 Look at this example Find the (a) current price per share of HSBC Investor’s SmCapEq fund. What was the price per share (b) yesterday and (c) at the beginning of the year? a: current price per share = $12.95 (NAV) b: daily % return = +0.9% yesterday’s NAV = current NAV/100% + daily % return (100.9%) 12.95/1.009 = [price per share yesterday]

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ All Rights Reserved 35 Example (cont.) (c) Year to date % return = 12.3% NAV at beginning of year = current NAV divided by 100% + YTD % Ret 12.95/ 100% % 12.95/112.3% = / $11.53 (rounded) is the year to date % return