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Chapter 1: Problem 5

Laura bought 55 shares of stock for \(\$ 3.50\) per share last year. She paid her broker a 1\(\%\) commission. She sold the stock this week for \(\$ 2\) per share, and paid her broker a \(\$ 10\) flat fee. a. What were Laura's net proceeds? Round to the nearest cent. b. What was her capital gain or loss?

Short Answer

Expert verified
a. Laura鈥檚 net proceeds were \$100. b. Laura made a capital loss of about \$94.43.

Step by step solution

01

Calculate the original cost of the stocks

The original cost of the stocks can be calculated by multiplying the number of shares Laura purchased \(55\) by the buying price per share \(\$3.50\). This gives: \(55 * 3.50 = \$192.50\). Now, calculate the broker's commission by multiplying the original cost or total buying price with the commission rate \(1\%\) that gives: \(192.50 * 0.01 = \$1.925\). Adding the commission to the original cost gives: \(192.50 + 1.925 = \$194.425\). Therefore, Laura's original cost, including the broker's commission, was about \$194.43 (rounded to the nearest cent).
02

Calculate the net proceeds from selling the stocks

The proceeds from selling the stocks can be calculated by multiplying the number of stocks sold by the selling price per share: \(55 * 2 = \$110\). Then, subtract the broker's flat fee from the total selling price: \(110 - 10 = \$100\). Therefore, Laura鈥檚 net proceeds from selling the stocks were \$100.
03

Calculate the capital gain or loss

The capital gain or loss is determined by subtracting the original cost of the stocks (including the broker's commission) from the net proceeds of selling the stocks: \(100 鈥� 194.43 = -\$94.43\). Therefore, Laura made a capital loss of about \$94.43.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Stock Transactions
Stocks represent ownership in a company, and buying or selling them is referred to as stock transactions. In Laura's situation, she purchased 55 stocks at \\(3.50\ per share, which means she acquired part of a company through these stocks.
Buying stocks means paying attention to each share's price, which can change based on the market.When you sell stocks, like how Laura sold hers at \\)2\ per share, you hope to sell them for more than what you bought them.
  • Buying price: amount spent to purchase stocks
  • Selling price: amount received from selling stocks
Stock transactions also include considering various costs related to buying and selling.
These can directly impact your overall profit or loss from the investment.
Broker Commissions
Whenever stocks are bought or sold, brokers often get involved to make the transactions smoother. They charge a fee for their services, known as a broker's commission.
A percentage of the transaction or a flat fee, like in Laura's case, can be charged.When Laura bought her stocks, she paid a broker's commission of 1% on her purchase price.
This means an extra cost on top of the price of the stocks she bought.
  • 1% Commission on buying = additional cost
  • \[ Commission \ on \ original \ cost = \frac{1}{100} \times 192.50 = 1.925 \]
Therefore, her total buying cost was inclusive of this commission.
Similarly, when selling, Laura had to pay a flat fee, decreasing her selling price's net amount.This fee structure affects how much you actually profit or lose from the entire transaction.
Net Proceeds Calculation
Net proceeds are how much money you actually make from selling stocks after paying all the required fees.
Calculating this correctly is essential to understanding if you've had a capital gain or loss.Laura sold her 55 shares at \\(2\ per share, meaning her total selling price was \\)110\.
From this amount, she had to pay a \$10\ broker's fee to sell, reducing her proceeds.Here's how you find the net proceeds:
  • Total Selling Price = Number of Shares Sold \( \times \) Selling Price Per Share
  • Net Proceeds = Total Selling Price \(-\) Broker's Fee
  • \[ Net \ Proceeds = 110 - 10 = 100 \]
This calculation shows what goes into your bank account after selling costs.
It's a necessary step to determine the financial outcome of the investment.

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Most popular questions from this chapter

Use the following ticker to answer Exercises 10鈥�17. The stock symbols represent the following corporations: PG, Procter & Gamble Co; BAC, Bank of America Corp; DIS, Walt Disney Co; and K, Kellogg Co. PG 4.5K@66.75?0.39 BAC 0.65M@36.17?0.54 DIS 2.55K @34.90?1.08 K 0.76K@51.49?0.04 What is the total value of all of the Bank of America shares traded?

Four people invested in a restaurant. One person invested \(\$ 100,000\) . Two others invested in the ratio \(x : 2 x,\) and the fourth person invested an amount equal to the other three investors combined. The total investment was \(\$ 1,100,000\) . a. Write an expression for the amount invested by the fourth person. b. Write an equation that allows you to find the amount invested by each person. c. How much did each person invest?

Vilma owns 750 shares of Aeropostale. On August \(22,\) the corporation instituted a 3 -for- 2 stock split. Before the split, each share was worth \(\$ 34.89\) . a. How many shares did Vilma hold after the split? b. What was the post-price per share after the split? c. Show that the split was a monetary non-event for Vilma.

For Exercises \(12-15\) , round answers to the nearest tenth of a percent. The Revreg Corporation pays an annual dividend of \(\$ 1.60\) per share. On Friday it closed at \(\$ 44\) per share with a net change of \(+0.35 .\) The dividend did not change. a. What was the yield on Friday? b. At what price did Revreg close on Thursday? c. What was the yield at Thursday's close? d. Thursday's net change was + \(1.22 .\) At what price did Reverg close on Wednesday?

General Motors stock fell from \(\$ 32\) per share in 2006 to \(\$ 20\) per share during 2008 . a. If you bought and then sold 300 shares at these prices, what was your loss? b. Express your loss as a percent of the purchase price. Round to the nearest tenth of a percent.
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