BUS 119 Personal Finance: Calculate the dividend yield for both stocks
Assignment 1 (50 pts)
Question 1 (20 pts)
Here is some data on the stocks of two companies. Both these companies are about the same size, have similar operations, and are in the same industry. Study the table provided and answer the questions that follow. Please make your answers as detailed as possible. Try to avoid one-line answers. Answer each question as completely as possible.
IMPORTANT: Before answering this question, please read the Mutual funds lesson on CNN Money, money.cnn.com. The link is below. Make sure to read all the pages in the lesson by following the links at the bottom of the page. Also, please make sure to read the definitions of these terms in chapter 12.
|STOCK 1||STOCK 2|
|Earnings per share (EPS)||$2||$10|
|EPS last year||$1.50||$11|
|Dividend yield||___ % (calculate)||___ % (calculate)|
|Price to Earnings (PE) ratio||___ (calculate)||___ (calculate)|
- Calculate the dividend yield for both stocks. Interpret the meaning of the dividend yield (Explains what it means) for both stocks. Which stock is more attractive based on dividend yield?
- Define and interpret the EPS number (Explain what it means). Can it be used in determining whether the stock is attractive? If so, how?
- Calculate the P/E ratio for each stock. Compare and interpret the P/E ratios for the two companies
- Based on the data provided, which stock is expected to be more volatile? Why?
Question 2 (15 pts)
IMPORTANT: Before answering this question, please read the Mutual funds lesson on CNN Money, money.cnn.com. The link is below. Make sure to read all the pages in the lesson by following the links at the bottom of the page.
I also expect you to use sites such as Yahoo Finance to further research what “index” funds are, and what “Load” funds are.
Here are 3 funds that were recommended to you by a financial advisor. Your job is to analyze each one and answer the questions below.
|FUND 1||FUND 2||FUND 3|
|Description||This fund invests in stocks of large companies, and its goal is tracking the S&P 500. It imposes a commission and is sold through brokers.||This fund invests in companies with a history of paying dividends. It is an “Equity-Income fund”. It does not impose a sales commission. The fund’s managers try to choose stocks that will beat the S&P 500 index||This fund’s invests in foreign stocks but does not employ a fund manager. It seeks to track a foreign stock index. It does not impose a sales charge.|
|Expense ratio||0.3 %||1.8 %||2.5%|
|Load or No-Load fund? Please answer as “Load” or “No Load”||_____ (1 pt)||_____ (1 pt)||_____ (1 pt)|
|Managed or Index fund?||_____ (1 pt)||_____ (1 pt)||_____ (1 pt)|
- What are some advantages / positives (if any) of fund #1? Are there any disadvantages/negatives? (3 points)
- What are some advantages / positives (if any) of fund #2? What are some disadvantages/negatives (if any)? (3 points)
- What are some advantages / positives (if any) of fund #3? What are some disadvantages/negatives (if any)? (3 points)
Question 3 (15 pts)
Imagine you are 30 years old and would like to retire when you are 60 years old. On December 31st of your 30th year, you invest $10,000 in an investment brokerage account. With the $10,000, you buy 2 mutual funds. $5000 is invested in a stock mutual fund that is expected to return 7% per year, and $5000 in a Bond mutual fund that is expected to return 4% per year. Every subsequent year, on December 31st, you continue to add $5000 to the IRA, of which $4000 goes into the stock mutual fund and $1000 goes into the bond mutual fund.
Please use the tables in the Time value of Money Appendix from the textbook for your calculations. Show your calculations clearly. Do not use Excel or websites such as Moneychimp.com. If you are not sure about the approach to use, make a posting to the Course topics board or send me an email and I can steer you in the right direction.)
- Assuming you get the returns anticipated, what will be the balance in the stock mutual fund after 30 years (i.e. right after the 30th deposit. To avoid confusion, use the 30-year column from the Time Value of Money table)? (5 pts)
- Assuming you get the returns, anticipated, what will be the balance in the bond mutual fund after 30 years? (5 pts)
- Given the above, what is the total balance in your account? Your goal is to accumulate $2 Million in this account by the time you retire. How much MORE will you need to contribute to the account (assume that the entire extra contribution will go into the stock mutual fund) each year to achieve this goal? (5 pts)