1. STOCKS, BONDS, AND MUTUAL FUNDS Chapter Twenty One Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 21-2 1. Read, calculate, and explain stock quotations. 2. Calculate dividends of preferred and common stocks; calculate return on investment. LU21-1: Stocks LEARNING UNIT OBJECTIVES LU 21-2: Bonds 1. Read, calculate, and explain bond quotations. 2. Compare bond yields to bond premiums and discounts. 1. Explain and calculate net asset and mutual fund commissions. 2. Read and explain mutual fund quotations. LU 21-3: Mutual Funds

3. 21-3 Cumulative preferred stock – entitles its owners to a specific amount of dividends in 1 year Stock – shares of ownership in a company Common stock – stock that allows owners to have voting rights STOCKS Preferred stock – does not allow voting rights, but gives preference over common stockholders in dividends

4. 21-4 STOCKS Dividends – payments to shareholders from profit Dividends in arrears - payments owed to cumulative preferred shareholders Stockholders Elect Board of Directors Elect Officers of Corporation

5. 21-5 HOW STOCKS ARE TRADED? Stockbrokers – People who buy and sell stock on the floor of the exchanges; they charge a commission for trading stocks Stock exchanges – an orderly trading place for stock

6. 21-6 STOCK QUOTATIONS IN NEWSPAPERS

7. 21-7 Closing price per share of stock Annual earnings per share Earnings per share = Annual earnings Total number of shares outstanding STOCK QUOTATION CALCULATIONS Annual dividend per share $1.21 Today’s closing price per share $39.09 *Earnings per share are not listed on the stock quote. Stock yield ==3.1%= PE Ratio = $39.09 $2.30 = 17=

8. 21-8 DIVIDENDS ON PREFERRED AND COMMON STOCK The stock records of Jason Corporation show the following: Preferred stock issued: 20,000 shares. In 2014, Jason paid no dividends. Preferred stock cumulative at $.80 per share.In 2015, Jason paid $512,000 in dividends. Common stock issued: 400,000 shares. 2014 Dividends paid0 Preferred stockholders Paid: 0 Owe: 20,000 x $.80 = $16,000 Common Stockholders0 2015 Dividends paid $512,000 Paid for 2014 16,000 Paid for 2015 16,000 32,000 Total dividend 512,000 Paid preferred for ‘14 & ’15 -32,000 Common Stockholders $480,000 $480,000 = $1.20 per share 400,000 shares

9. 21-9 RETURN ON INVESTMENT Suppose you bought 200 shares of General Mills stock at $39.09 and sold them 1 year later at $41.10. With a 1% commission rate buying and selling the stock and a current $1.21 dividend per share in effect, what was your return on investment? Bought 200 shares at $39.09 = $7,818.00 Commission at 1% = 78.18 Total cost $7,896.18 Sold 200 shares at $41.10 = $8,220 Commission at 1% = - 82.20 Total cost $8,137.80 Total receipt$8,137.80 Total cost -7,896.18 Net Gain $241.62 Dividends+ 242.00(200 x $1.21) Total Gain $483.62 $ 483.62 $7,896.18 6.12% rate of return

10. 21-10 BOND QUOTATIONS IN NEWSPAPERS Yearly interest = Face value of bond x Stated yearly interest rate $56.50 = $1,000 x.0565

11. 21-11 BOND QUOTATIONS IN NEWSPAPERS = 5.7%= 5.69% Yearly interest: Cost of bond: (.0565 x $1,000) (.9959 x $1,000) = $56.50 $995.90 =

12. 21-12 CALCULATING BOND YIELDS Bond yield = Jim Smith bought 5 bonds of Coke at the closing price of 99.59. What is Jim’s interest? (Remember that in dollars 99.59 is $995.90.) $282.50 $ 4979.50 Total annual interest of bond Total current cost of bond at closing 5 bonds x $56.50 interest per bond per year 5 x $995.90 = 5.7% = Example:

13. 21-13 WHY INVESTORS CHOOSE MUTUAL FUNDS Diversification Liquidity Low fund expenses Access to foreign markets Professional management

14. 21-14 NET ASSET VALUE NAV = Current market value of fund’s investment -- Current liabilities Number of shares outstanding Net asset value (NAV) – the dollar value of one mutual fund share Mutual fund – a portfolio of stocks and/or bonds

15. 21-15 COMMISSIONS: MUTUAL FUNDS ClassificationCommission chargeOffer price to buy No-load (NL) fundNo sales chargeNAV (Buy directly from investment company) Low-load (LL) fund3% or lessNAV + commission % (Buy directly from investment company or from a broker) Load fund8 ½% or less NAV + commission % (Buy from a broker)

16. 21-16 MUTUAL FUND QUOTATIONS IN NEWSPAPERS FUND Net YTD3-Yr. NAME NAV Chg % Ret % Ret. Grln P 13.82 -0.068.971.6 NAV plus the sales commission Net Chg >Changes in NAV versus the previous day YTD % Ret > Fund return this year