P1.2
During 2009, the Allens and the Zells both filed joint tax returns. The Allens’ taxable
income was $130,000, and the Zells had total taxable income of $65,000 for the tax year ended
December 31, 2009.
a. Using the federal tax rates given in Table 1.2, calculate the taxes for both the Allens
and the Zells.
b. Calculate and compare the ratio of the Allens’ to the Zells’ taxable income and the
ratio of the Allens’ to the Zells’ taxes. What does this demonstrate about the federal
income tax structure?
TABLE 1.2
Taxable Income
Tax Rates Individual Returns Joint Returns
10% $0 to $8,350 $0 to $16,700
15 8,351 to 33,950 16,701 to 67,900
25 33,951 to 82,250 67,901 to 137,050
28 82,251 to 171,550 137,051 to 208,850
33 171,551 to 372,950 208,851 to 372,950
35 Over 372,950 Over 372,950
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P1.4
Mike and Julie Bedard are a working couple. They will file a joint income tax return. This
year, they have the following taxable income:
1. $125,000 from salary and wages (ordinary income).
2. $1,000 in interest income.
3. $3,000 in dividend income.
4. $2,000 in profit from sale of a stock they purchased two years ago.
5. $2,000 in profit from a stock they purchased this year and sold this year.
Use the federal income tax rates given in Table 1.2 to work this problem.
a. How much will Mike and Julie pay in federal income taxes on 2 above?
b. How much will Mike and Julie pay in federal income taxes on 3 above? (Note:
Remember that dividend income is taxed differently than ordinary income.)
c. How much will Mike and Julie pay in federal income taxes on 4 above?
d. How much will Mike and Julie pay in federal income taxes on 5 above?
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P2.2
An investor recently sold some stock that was a Eurodollar investment for 20,000 euros.
The U.S.$/euro exchange rate is currently 1.100. How many U.S. dollars will the investor
receive?
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P2.4
Erin McQueen purchased 50 shares of BMW, a German stock traded on the Frankfurt Exchange, for 64.5 Euros per share exactly one year ago when the exchange was .78 Euro/US$. Today the stock is trading at 68.4 Euros per share, and the exchange rate is .86 Euro/US$.
A. Did Euro depreciate or appreciate relative to the US$ the past year? Explain
B. How much in US$ did Erin pay for her 50 shares of BMW when she purchase them a year ago? C. For how much in the US$ can Erin sell her BMW shares today?
D. Ignoring the brokerage fee and taxes, how much profit (or loss) in US$ will Erin realize on her BMW stock if she sells it today?
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P2.10
Miguel Torres purchased 100 shares of Can’t Win.com for $50 per share, using as little of his own money as he could. His broker has a 50% initial margin requirement. The price of the stock falls to $30 per share. What does Miguel need to do?
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P2.12
An investor buys 200 shares of stock selling at $ 80 per share using a margin of 60%. The stock pays annual dividends $ 1 per share. A margin loan can be obtained at an annual interest cost of 8%. Determine what return on invested capital the investor will realize if the price of the stock increases to $ 104 within six months. What is the annualized rate of return on this transaction?
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P2.14
Not long ago, Jack Edwards bought 200 shares of Almost Anything Inc. at $45 per share; he bought the stock on margin of 60%. The stock is now trading at $60 per share, and the Federal Reserve has recently lowered initial margin requirements to 50%. Jack now wants to do a little pyrimiding and buy another 300 shares of the stock. What is the minimum amount of equity that he’ll have to put up in this transaction?
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P3.2
Imagine that the Mini-Dow Average (MDA) is based on the closing price of five stocks. The divisor used in the calculation of the MDA is currently 0.765. The closing prices for each of the five stocks in the MDA today and exactly one year ago, when the divisor was 0.790, are given in the accompanying table:
closing stock prices
Stocks Today One year ago
Ace Computers $65 $74
Coburn Motor Company 37 34
National Soap & Cosmetics 110 96
Ronto Foods 73 72
Wings Aircraft 96 87
- Calculate the MDA today and that of a year ago
- Compare the values of the MDA calculated in part A and describe the apparent market behavior over the last year. Was it a bull or bear market?
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P3.4
Deepa Chungi wishes to develop an average or index that can be used to measure the general behavior of stock prices over time. She has decided to include six closely followed, high quality stocks in the average or index. She plans to use August 15, 1984, her birthday, as the base and is interested in measuring the value of the average or index in August 15, 2008 and August 15, 2011. She has found the closing prices for each of the six stocks, A through F, at each of the three dates and has calculated a divisor that can be used to adjust for any stock splits, company changes, and so on that have occurred since the base year, which has a divisor equal to 1.00.
Closing stock prices
Stock Aug 15, 2011 Aug 15, 2008 Aug 15, 1984
A $46 $40 $50
B 37 36 10
C 20 23 7
D 59 61 26
E 82 70 45
F 32 30 32
Divisor 0.70 0.72 1.00
- Using the data given in the table calculate the market average, using the same methodology used to calculate the Dow averages, at each of the three dates.
- Using the data given in the table and assuming a base index value of 10 on August 15, 1984, calculate the market index, using the same methodology used to calculate the S&P indexes, at each of the three dates.
- Use your findings in part a and b to describe the general market conditions, bull or bear, that existed between August 15, 2008 and August 15, 2011.
- Calculate the percentage changes in the average and index values between August 15, 2008 and August 15, 2011. Why do they differ?
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P3.6
Imagine that you have placed a limit order to buy 100 shares of Sallisaw Tool at a price of $38, though the stock is currently selling for $41. Discuss the consequences, if any, of each of the following.
a. The stock price drops to $39 per share 2 months before cancellation of the limit order.
b. The stock price drops to $38 per share.
c. The minimum stock price achieved before cancellation of the limit order was $38.50.When the limit order was canceled, the stock was selling for $47.50 per share.
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P3.8
You sell 100 shares of a stock short for $40 per share. You want to limit your loss on this transaction to no more than $500. What order should you place?
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P3.10
You own 500 shares of Ups&Downs, Inc stock. It is currently priced at $50. You are going on vacation, and you realize that the company will be reporting earnings while you are away. To protect yourself against a rapid drop in the price, you place a stop-limit order to sell 500 shares at $40. It turns out the earnings report was not so good, and the stock price fell to $30 right after the announcement. It did however bounce back and by the end of the day it was back to $42.
What happened in your account?
ScholarMatic: Explanation & Answer
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