Example: A(n) is the use of money to earn the best possible return with the least amount of risk.

Transcription

1 chapter 12Investing in Stocks 1 section: vocabulary Fill in the missing word(s) in the space provided at the right. Example: A(n) is the use of money to earn the best possible return with the least amount of risk. 0. investment 1. A public issues stock that may be traded openly on the stock markets or over-the-counter. 1. corporation 2. When a company is profitable, the stockholders often receive a distribution of money called. 2. dividends 3. Common stockholders vote for members of the. 3. board of directors 4. A(n) is an increase in the number of outstanding shares of a stock. 4. stock split 5. means using dividends previously earned on stock to buy more shares. 5. Dividend reinvestment 6. Stocks that pay high dividends over time are called stocks. 6. income 7. Stocks in companies that reinvest profits, rather than pay dividends, are called stocks. 7. growth 8. A(n) is a benchmark that stock investors use to judge investment performance. 8. stock index 9. Stocks of large, well-established companies are called stocks. 9. blue chip 10. A(n) stock is one that remains stable during an economic decline. 10. defensive 11. stocks do well in a good economy but poorly in a bad one. 11. Cyclical 12. The is an assigned dollar value that is printed on a stock certificate. 12. par value 13. When you buy stock, you pay value. 13. market 14. A corporation s after-tax earnings divided by the number of common stock shares outstanding is. 14. earnings per share 15. A(n) market is characterized by rising stock prices and optimism. 15. bull 16. A(n) market is characterized by the selling of stocks and pessimism. 16. bear 17. A marketplace where brokers buy and sell securities is called a(n). 17. securities exchange 18. Stocks are bought and sold by. 18. floor brokers 19. Stock exchanges are markets where buyers and sellers come together to buy and sell securities. 19. auction 20. Borrowing money to buy stock is called. 20. buying on margin (leverage) 119

2 Section 2 Review Questions 2 section: review questions After each of the following statements, circle T for a true statement or F for a false statement. For Answers Scoring 1. Very few people (individuals) own stock in the United States. T F 1. F 2. With preferred stock, dividends are fixed, regardless of how the company is doing. T F 2. T 3. You can assign your stock voting rights to someone else by completing a proxy. T F 3. T 4. The par value assigned to a stock has nothing to do with the stock s market value. T F 4. T 5. Stock is purchased on a stock exchange at its par value. T F 5. F 6. The securities market is where you buy and sell stocks and bonds. T F 6. T 7. Brokers in the over-the-counter market only deal face-to-face with customers. T F 7. F 8. Short selling involves selling borrowed stock. T F 8. T 9. Buying on margin is an illegal activity. T F 9. F 10. Dollar-cost averaging is a short-term investment strategy. T F 10. F On the line at the right of each sentence, print the letter that represents the word or group of words correctly completing the sentence or answering the question. 1. The letter s next to a stock in the stock listings would mean (a) no stock sold, (b) common stock, (c) stock split, (d) no dividends. c Which of the following is true? (a) You can buy and sell stocks online. (b) Most major stockbrokers have web sites that allow online transactions. (c) You can use Internet sites to follow stock prices. (d) All of these are true. d What represents the cost of dividends as a percentage of the current price? (a) P/E ratio, (b) par value, (c) yield, (d) net change c What is the long-term technique where investors buy stock directly from a corporation? (a) dividend reinvestment, (b) stock split, (c) direct investment, (d) buy and hold c What strategy lowers the selling price of a stock and encourages more stock purchasing? (a) stock split, (b) dividend reinvestment, (c) dollar-cost averaging, (d) P/E analysis a Which of these strategies is a short-term technique? (a) buying on margin, (b) buy and hold, (c) dollar-cost averaging, (d) direct investment a Which of these strategies is a long-term technique? (a) buying on margin, (b) selling short, (c) buy and hold, (d) all of the above c Which of the following is the largest organized exchange in the United States? (a) the American Stock Exchange, (b) the NASDAQ, (c) the New York Stock Exchange, (d) they are all the same size c

3 Chapter 12 3 section: problem solving Activity 12.1 Stock Dividends Directions: Based on the information given, compute yearly total dividends as well as dividends per share paid to common and preferred stockholders. 1. There are 5,000 shares of $50 par value preferred stock outstanding, and 25,000 shares of common stock outstanding. Preferred stock has an 8 percent guaranteed rate of return. Dividends are declared of $1.25 per share of common stock, together with the guaranteed rate for preferred stock. Common Stock: 25,000 x $1.25 = $31,250 Preferred Stock: 5,000 x $50 = $250,000 $250,000 x.08 = $20, There are 10,000 shares of $20 par value cumulative 7 percent preferred stock outstanding, and 90,000 shares of common stock outstanding. Last year, the preferred stock did not receive its dividend because of a loss. This year, dividends of $50,000 are distributed to shareholders. Preferred Stock: 10,000 x $20 = $200,000 $200,000 x.07 = $14,000 $14,000 x 2 years = $28,000 $28,000/10,000 = $2.80/share Common Stock: $50,000 $28,000 = $22,000 dividends $22,000/90,000 = $.24/share 3. There are 7,500 shares of $10 par value participating 9 percent preferred stock outstanding, and 32,500 shares of common stock outstanding. The common stock cash dividend is $.50 per share, and total dividends of $50,000 are distributed. Remaining dividends are shared equally between common and preferred stockholders. Preferred Stock: 7,500 x $10 = $75,000 $75,000 x.09 = $6,750 dividends Common Stock: 32,500 x $.50 = $16,250 dividends $50,000 ($16,250 + $6,750) = $27,000 remaining Preferred: $6,750 + $13,500 = $20,250 total dividends $20,250/7,500 shares = $2.70/share Common: $16,250 + $13,500 = $29,750 total dividends $29,750/32,500 shares = 91.5 cents/share 121

4 Section 3 Problem Solving Activity 12.2 Computing Stock Returns Directions: Based on the information given, compute stock returns. Refer to Figure 12.1 in your textbook for the formula for computing a stock s one-year return. 1. John Adams purchased 100 shares of XYZ Corporation for $25 a share and paid a commission of $125. The current price of the stock is $32 per share. Last year, John received dividends of $1 per share. [($32 $25) x 100] + (100 x $1) $800 = ($25 x 100) + $125 $2,625 = 30.48% 2. Sally Clark purchased 500 shares of ABC Corporation for $10 per share and paid a total commission of $200. The current price of the stock is $12 per share. Last year, Sally received dividends of $2 per share. [($12 $10) x 500] + (500 x $2) = $2,000 ($10 x 500) + $200 $5,200 = 38.46% 3. Alice Kruse purchased 1,000 shares of Kendall Corporation for $22.50 per share and paid a total commission of $575. The current price of the stock is $25 per share. Last year, Alice received dividends of $880. [($25 $22.50) x 1,000] + $880 = $3,380 = 14.65% ($22.50 x 1,000) + $575 $23, Mike Welch purchased 5,000 shares of Grass Roots stock for $82 per share and paid a commission of 1 percent on the purchase price. The current value of the stock is $96 per share. Mike received no dividends last year. [($96 $82) x 5,000] $70,000 = = 16.9% ($82 x 5,000) + $4,100 $414,

5 Chapter 12 Activity 12.3 Buying on Margin Directions: Based on the information given, compute the rates of return for the following margin transactions. Use Figure 12.2 as your model. 1. Rick Mendez bought stock for $5,000, using $2,500 of his own money and $2,500 borrowed from the broker. One month later, the stock is sold for $5,650. Interest owed to the broker is $30; brokerage commissions to buy and sell the stock totaled $300. $5,650 ($2,500 + $2,500 + $30 + $300) = $320 $320 = 6.00% $5, Julie Martin bought stock for $3,000, using $2,000 of her own money and $1,000 borrowed from the broker. One month later, the stock is sold for $3,850. Interest owed to the broker is $15; brokerage commissions to buy and sell the stock totaled $150. $3,850 ($2,000 + $1,000 + $15 + $150) = $685 $685 = 21.64% $3,165 Activity 12.4 Selling Short Directions: Based on the information given, compute the rates of return for the following short transactions. Use Figure 12.3 as your model. 1. Andy Hastings borrowed 500 shares of stock from a broker. This stock is currently selling for $25 a share ($12,500). The commission was $125. Three weeks later, the price of the stock was $22.50 a share, so he bought the 500 shares. The commission was $115. He returned a stock certificate for 500 shares to the broker. 500 $25 = $12,500; $12,500 $125 = $12, $22.50 = $11,250; $11,250 + $115 = $11,365 $12,375 $11,365 = $1,010 $1,010/$11,365 = 8.9% 2. Cindy Jacobs borrowed 100 shares of stock from her broker, and then sold the stock for $45 a share ($4,500). The commission was $65. A month later, the price of the stock was $42.50 a share, so she bought the 100 shares. The commission was $60. She returned the 100 shares to the broker. 100 $45 = $4,500; $4,500 $65 = $4, $42.50 = $4,250; $4,250 + $60 = $4,310 $4,435 $4,310 = $125 $125/$4,310 = 2.9% 123