1. What is the federal income tax owed by an investor in the 35 percent income tax bracket (15 percent tax rate on long-term capital gains and dividend income)?
a. Megan sold Stock A for a short-term capital gain of $5,500; sold Stock B for a short-term capital loss of $2,100.
b. Margaret sold Stock A for a short-term capital loss of $2,000; sold Stock B for a short-term capital gain of $4,000.
c. Melissa is 70 years old and withdraws $1,000 from her Roth IRA account. Would the answer be different if she were 65 years old?
d. Morgan bought 100 shares of IBM in March for $100 a share and sold the shares in April of the same year for $110.
e. Murphy contributed $4,000 to an IRA and used the proceeds to purchase stock A for $4,000. The stock was subsequently sold for $4,500 after year had passed.
2. An investor purchased on margin Orange Computer for $30 a share. The stock's price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor's funds (excluding commissions)? What would have been the return if the investor had not bought the stock on margin?
3. An investor sells 100 shares short at $43. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. If the investor closes the position at $49, what was the percentage earned or lost on the investment? If the position had been closed when the price of the stock was $27, what would have been the percent earned or lost on the position? (ignore any dividends, interest or commissions that would normally apply in a short sale)
4. a. What is the expected return on a portfolio consisting of an equal amount invested in each stock?
Stock Expected Return
A 15%
B 10
C 22
D 14
b. What is the expected return on the portfolio if 50 percent of the funds are invested in stock C, 30 percent in stock A, and 20 percent in Stock D, and nothing in stock B?
5. Given the following information:
Expected return on Stock A .12 (12%)
Standard deviation of return .1
Expected return on Stock B .20 (20%)
Standard deviation of return .6
Correlation coefficient of the
returns on Stock A and Stock B .2
a. What is the expected return and standard deviation of a portfolio consisting of 50 percent of funds invested in each stock?
b. What would be the impact on the portfolio standard deviation if the correlation coefficient were 0.6 instead of 0.2?
6. Mutual fund A earned 10 percent while B earned 8 percent (these figures are above any risk free rate of return). The standard deviations of the returns were 10 percent and 7 percent, respectively. According to the Sharpe ratio, which fund performed better?
7. A mutual fund's net asset value is $50, but the fund charges an exit fee of 1 percent of net asset value and a load fee of 4 percent of net asset value. An individual purchases the shares. During the year the fund distributes $2.34. The net asset value rises to $58.38 and the investor redeems the shares.
a. What is the percentage return the fund can report that was achieved by its portfolio managers.
b. What is the percentage return the individual earned on the investment?
c. Why are the two percentages different?
8. A firm's stock sells for $100 a share. What will be the price after a
a. two for one split
b. four for one split
c. one for two reverse split?
9. A firm's balance sheet has the following entries:
Cash $30,000,000
Total assets 100,000,000
Common stock (10,000,000 20,000,000
shares outstanding, $2 par)
Additional paid in capital 5,000,000
Retained earnings 35,000,000
What will be each of these balance sheet entries after a
a. $2 a share cash dividend
b. four for one split
c. 5 percent stock dividend (current price of the stock is $20)?