SECURITIES BONDS AND SHARES

PROBLEM SOLVING SESSION

QUESTION 1
Suppose that on January 2 you purchased 100 shares of Dell
Inc. common stock for $25 per share. It is now December 31,
and the Dell stock that you purchased at the beginning of the
year is selling for $26. If Dell paid a dividend equal to $1.50 per
share during the year, what is the annual yield that you earned?
Answer

QUESTION 2
A company issues shares of 100 $ (issue) market price. The
dividend portion that will be distributed to investors is 40 $ and
issue costs are 8 $. What is the cost of A shares ?
Answer
Net proceeds = Market price – Floatation costs = Net fund
provided by issue is 100 – 8 = 92 $
Cost of shares = Dividend/Net proceeds = 40 / 92
= 0,43 = 43%
QUESTION 3
What is the Price to earnings ratio PE of the company ?
a) if the annual earnings per share is 2 $ and market value per
share is 15 $ ?
Answer
Price to earnings ratio PE = Market Value per share
Annual earnings per share
= 15 / 2 = 7,5
How to express it percentage 1/ 7,5 = %13,33 is the yield of
share for investors,
Or E/ P = 2/ 15 = 0,1333 which is % 13,33 = earnings yield

The inverse of the P/E ratio is the earnings yield (which can be
thought of like the E/P ratio).
The earnings yield is thus defined as EPS (earnings per share)
divided by the stock price, expressed as a percentage.
b) if the company’s growth rate is %5 for every year ?
Answer
then, next year the earnings will increase as
2 $ x 0,05 = 0,10 $
the earnings will increase by 0,10 $
Therefore, the Company will announce 2,10 $ profit for the next
year
So the earnings yield will 2,10/15 = 0,14 which is %14.
Therefore, with a growth rate of 5% the investor will expect to
have a yield of %14

QUESTION 4
If company A issues 4.000.000 shares in number with a price of
5 $ and the Owners equity is 5.000.000 $ what is the market to
book ratio of the company ?
Answer
The Market to Book ratio (also called the Price to Book ratio)
Book Value (per share) = Owners Equity = 5.000.000 = 1,25
Total shares 4.000.000

Market to Book = Price per share = 5__ = 4

Book Value per share 1,25

QUESTION 5
A bond with a 5 year maturity has a price (face or nominal
value) of 1000 $. If the interest rate of bond is % 15, what is the
value of bond ?
Answer
Present Value= FV_
(1+r ) n

where:
FV = Future Value (maturity value)
R = Rate of return
n= Number of periods
1000 $ (five year value)
Present Value= 1000 = 497 $
(1+0,15) 5

497 $ is the current price or present value of the bond

QUESTION 6
Consider a $1,000 bond that has two years until maturity. If the
bond is currently valued at $925 ( the price at which it could be
purchased today) what is the yield to maturity ?
Answer