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Chapter 14: Problem 4

Marie and Bob Houmas purchased 200 shares of General Electric stock for \(\$ 19\) a share. One year later, they sold the stock for \(\$ 28\) a share. They paid their broker a \(\$ 130\) commission when they purchased the stock and a \(\$ 150\) commission when they sold it. During the 12 months they owned the stock, they received \(\$ 175\) in dividends. Calculate the total return on this investment. (Obj. 1)

Short Answer

Expert verified
The total return on the investment is $1695.

Step by step solution

01

Calculate Initial Investment

First, find out how much Marie and Bob spent when they initially purchased the stock. They bought 200 shares at \(\\(19\) each and paid a brokerage commission of \(\\)130\). Therefore, the initial investment is \((200 \times 19) + 130 = 3800 + 130 = 3930\) dollars.
02

Calculate Total Selling Price

Next, determine how much they gained from selling the 200 shares. They sold the shares for \(\\(28\) each. The selling price amounts to \(200 \times 28 = 5600\) dollars before deducting the broker's commission of \(\\)150\). Thus, the net amount received from the sale is \(5600 - 150 = 5450\) dollars.
03

Calculate Total Return

To find the total return, subtract the initial investment from the net selling price and add any dividends received. So, the return is \((5450 - 3930) + 175 = 1520 + 175 = 1695\) dollars.

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Key Concepts

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

Stock Market Investment
Investing in the stock market involves buying shares of a company, which represent a small ownership stake in that business. When individuals like Marie and Bob decide to buy shares, they aim for their investment to grow in value over time.
  • Stocks are bought at a particular price per share, which is determined by current market conditions.
  • The value of these shares can fluctuate based on a variety of factors including the company's performance, the overall economy, and investor sentiment.
In the case of General Electric, Marie and Bob bought their shares at $19 each. Later, these shares increased in value to $28 per share, benefitting their investment. It's crucial for investors to pay attention to such price changes as they directly impact the potential profit or loss one might experience.
Dividend Income
Dividend income is an additional way investors can earn money from owning stocks. Companies distribute a portion of their earnings to shareholders in the form of dividends. This can be a regular source of income for stockholders without having to sell their shares.
  • Amount of dividend depends on the company鈥檚 profits and its policy on sharing dividends.
  • Dividends are usually paid quarterly, but the frequency and amount can vary.
For Marie and Bob, owning General Electric stock provided them $175 in dividends over the year. This means, aside from the rise in stock price, they still made money from simply holding the shares. Including dividends in the calculation of total return is important because it reflects the true earnings from the investment.
Brokerage Commissions
When buying and selling stocks, investors must consider brokerage commissions. These are fees paid to a broker for processing the transaction of buying or selling shares.
  • Commissions vary based on the brokerage firm and the type of account.
  • They can affect the total cost of investment and the net return from selling stocks.
In Marie and Bob鈥檚 case, they paid $130 when purchasing and $150 when selling their stocks. These fees are part of the total investment cost and often overlooked by beginners. By subtracting these commissions, investors can see their actual earnings, making it an essential step in evaluating the return on any stock investment.

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Most popular questions from this chapter

After researching Toro common stock, Sally Jackson is convinced the stock is overpriced. She contacts her account executive and arranges to sell short 200 shares of Toro. At the time of the sale, a share of common stock had a value of \$48. Three months later, Toro is selling for \(\$ 41\) a share, and Sally instructs her broker to cover her short transaction. Total commissions to buy and sell the stock were \(\$ 74 .\) What is her profit for this short transaction? (Obj. 5 )

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Assume you own shares in Honeywell Inc. and that the company currently earns \(\$ 2.80\) per share and pays quarterly dividend payments that total \(\$ 1.10\) a share each year. Calculate the dividend payout for Honeywell. (Obj. 3 )

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Use the Internet, The Wall Street Journal, or a local newspaper to find the following information for the four stocks listed below in the chart. (Obj. 2) Date ________ Web site _______ or Newspaper name ______ $$\begin{array}{|l|l|l|l|l|l|l|} \hline \text { Stock } & \begin{array}{l} \text { Stock } \\ \text { Symbol } \end{array} & \begin{array}{l} \text { 52-Week } \\ \text { High } \end{array} & \begin{array}{l} \text { 52-Week } \\ \text { Low } \end{array} & \text { Dividend } & \begin{array}{l} \text { Dividend } \\ \text { Yield \% } \end{array} & \begin{array}{l} \text { Close } \\ \text { Price } \end{array} \\ \hline \text { Microsoft } & & & & & & \\ \hline \text { Clorox } & & & & & & \\ \hline \text { IBM } & & & & & & \\ \hline \text { Pfizer } & & & & & & \\ \hline \end{array}$$
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