1.What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns.
a.Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share).
b.Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero).
c.Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
3.The price of Garden Designs, Inc. is now $85. The company pays no dividends. Sean Perth expects the price four years from now to be $125 a share. Should Sean buy Garden Designs if he wants a 15 percent rate of return? Explain.
5.An investor in the 28 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?
7.Which of these two bonds offers the highest current yield? Which one has the highest yield to maturity?
a.A 6.55 percent, 22-year bond quoted at 52.000
b.A 10.25 percent, 27-year bond quoted at 103.625
1.Kate Wittman is considering whether she should invest some extra money in a mutual fund or an ETF. Explain the key factors that should influence her decision
3.About a year ago, Nigel Palmer bought some shares in the Equity Partners Fund. He bought the stock at $24.50 a share, and it now trades at $26.00. Last year, the fund paid dividends of 40 cents a share and had capital gains distributions of $1.83 a share. Using the approximate yield formula, what rate of return did Nigel earn on his investment? Repeat the calculation using a handheld financial calculator. Would he have made a 20 percent rate of return if the stock had risen to $30 a share?
7.Lilia Castillo is thinking about investing in some residential income-producing property that she can purchase for $200,000. Lilia can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 8 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Lilia is in the 28 percent tax bracket. Calculate her annual profit and return on investment assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 8 percent. Then discuss the effect, if any, of leverage on her rate of return. (Hint: Earnings Before Interest & Taxes minus Interest Expenses (if any) equals Earnings Before Taxes minus Income Taxes (@28 percent) equals Profit After Taxes.)
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