Page 149 - CalcBus_Flipbook

CH 18] Calculating Business 18-13

($15)
—— x 100% = 15.46%
$97

Dividend yield % + Price Change % = Total return %
7.22% + 15.46% = 22.68%

Rate of Total Gain or Loss on Stock Investment. The total gain from an investment is a
calculation of the total dividends received during the time the stock is held plus the capital gain
earned from the stock sale. To determine the Rate of Total Gain, the Total Gain from the
Investment is divided by the Cost of the Investment. This Rate can be positive or negative. This
value is expressed as a percent and may also be referred to as a Return On Investment (ROI).

Total Dividends Received + Capital Gain = Total Gain from Investment

Total Gain from Investment = Rate of Total Gain
Cost of Investment

Example: Charlotte O’Hara bought common stock at $54 a share. She received a regular
quarterly dividend of $1.25 a share. After owning the stock for 3½ years ( 3.5 years
x 4 quarters/yr = 14 quarters), she sold her stock at $65 a share. Assume that the
buying and selling prices reflect all commissions and the SEC fee. Determine the
rate of gain on her costs. Round to the nearest hundredth.

Solution algorithm:

Gain from dividends (14 quarters x $1.25) ....................................... $ 17.50
Capital gain ($65 — $54) ................................................................. 11.00
Total gain per share ......................................................................... $28.50

Total Gain $28.50
Rate of Gain on Cost = ——–——— = ———- x 100% = 0.5277 x 100% = 52.78% over 14 quarters
Investment $54

The average annual return for this investment would be:
(52.77% ÷ 14 quarters) x 4 quarters/year = 15.08% return per year

INVESTING IN BONDS

When corporations need to raise money, issuing bonds is generally their financial strategy Debenture: United
as opposed to going to a bank for a loan. The bond functions as a loan between the investor and States, an unsecured
the issuing corporation. The investor is lending the corporation a specific amount of money for a loan certificate issued
specified period of time in exchange for stated interest rate and those interest payments by a company,
backed by general
(coupons) are paid quarterly, semiannually or annually. credit rather than by
By law, a corporation may issue long-term securities yielding a fixed rate of interest as a specified assets.
secured or unsecured debt. In the United States an unsecured corporate debt is termed a Great Britain a long-
debenture, whereas, in Great Britain, this term refers to secured debt. In other countries, the term security yielding
term debenture is interchangeable. A secured debt has specific assets pledged to cover the debt a fixed rate of
should the borrower default on the debt, similar to a mortgage against a home. The interest, issued by a
indebtedness is evidence by a bond certificate issued by the company seeking to borrow money. company and
secured against
As such, all debentures are bonds, but not all bonds are debentures, which the bond assets. Other
represents. countries,
When a corporation issues and sells secured bonds, in the event of a company's failure, the interchangeable.
mortgaged property should be adequate to meet the debt and should the secured asset be
inadequate to meet the claims of the bondholders, the balance of the debt owed to them must
be paid before proceeds from the sale of any remaining assets can be divided among the
stockholders.
Government agencies, such as the federal government and city municipalities, issue
unsecured debt and the source of payment on these debts is through taxes levied on its
citizens. Bonds issued by the United States Government are backed by the ‘integrity of the
nation’ which is the taxpayer, and are considered to be the most stable as a guaranteed
investment. State and local governments, as corporate bodies, issue municipal bonds to acquire 18
funds for projects such as street construction and repairs, park purchases and construction,
hospital construction and improvements, and other public improvements that would benefit
their citizens and commerce. Municipal bonds are attractive to investors because the interest
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