Engineering Economy

Stocks and Bonds

Stock
A stock (also known as an equity or a share) is a portion of the ownership of a
corporation. A share in a corporation gives the owner of the stock a stake in
the company and its profits. If a corporation has issued 100 stocks in total,
then each stock represents a 1% ownership in the company.

2 types of stocks:

Common Stock
Preferred Stock




Stock
Common Stock

*Represents ownership of stockholders
who have a residual claim on the assets
of the corporation after all other claims
have been settled.

*No returns is guaranteed on the
investment of common stockholders.

Preferred Stock

*Has priority over common sock in the
receipt of dividend, usually guaranteed
a fixed annual dividend.


*In case the corporation is dissolved,
the owner of the preferred stock has
priority over the assets before the
common stockholders.
Stock
Common stockholders, as owner of the corporation, have the following
certain legal rights:

1.To call and hold meetings.
2.To vote at stockholders meetings
3.To elect the member of the board of directors.
4.To amend the charter of the corporation subject to the government
approval.
5.To prepare and amend the by-laws of the corporation.
6.To inspect the books of the corporation.
7.To receive dividends when such are declared.
8.To share the remaining assets, if any, when the corporation is
dissolved.

Stock
Preferred stock problems:
1. Timeless Corporation issued preferred stock with par value of
$700. the stock promises to pay an annual dividend equal to 19%
of the par value. If the appropriate discount rate for this stock is
10%, what is the value of the stock?
Solution:

2. Forever, Inc.'s preferred stock has a par value of $1,000 and a
dividend equal to 13.0% of the par value. The stock is currently selling
for $907.00. What discount rate is being used to value the stock?
Solution:


Pv=$1,330
D=14.33%
Stock
Common stock problems:
You are considering buying common stock in Grow On, Inc. The firm
yesterday paid a dividend of $5.20. You have projected that dividends
will grow at a rate of 8.0% per year indefinitely. If you want an annual
return of 20.0%, what is the most you should pay for the stock now?
Solution:
Po=$46.80
Stock
Common stock problems:
You are considering buying common stock in Grow On, Inc. You have
projected that the next dividend the company will pay will equal $4.00
and that dividends will grow at a rate of 5.0% per year thereafter. If you
would want an annual return of 13.0% to invest in this stock, what is the
most you should pay for the stock now?
Solution:



Po=$50.00
Bond
Bond is a certificate of indebtedness of a corporation usually for a
period of not less than 10 years, and guaranteed by a mortgage on a
certain assets of the corporation or its subsidiaries.

Bond represent indebtedness, and in return for the money borrowed
the corporation agrees to pay interest at a stipulated rate an at
specified period.
Classification of Bond
Bond may be classified according to the method of payment of interest
and to the security behind the bond.

According to the method of payment, bonds are classified into:
1.Registered Bonds
- In all registered bonds, the owners name is recorded in the books of
the corporation, and interest is paid periodically to the owner without
their asking for it.
2.Coupon Bonds
- These are bonds to which are attached coupons indicating the
interest due and the date wen such interest is to be paid
The owner can collect the interest due by surrendering the same or
cashing it at specified banks.
Classification of Bond
According to the security behind the bonds, bonds are classified into:

1.Mortgage Bonds
-These are bonds whose security is a mortgage on a certain specified
assets of the corporation.

2.Collateral Trust Bonds
-In such types of bonds, the corporation pledges securities which it
owns, such as stocks or bonds of one of its subsidiaries.


Classification of Bond
3. Equipment Obligations Bonds
-These bonds refer primarily bonds guaranty is a lien on railroad
equipment, such as passenger cars, locomotives and other railroad
equipment.
4. Debenture Bonds
-These are bonds without any security behind them except a promise
to pay by the issuing corporation. These bonds may only be issued by
large and well-known firms, whose records are well known in public.
5. Joint Bonds
-Sometimes two or more corporations issue bonds which are
guaranteed jointly. Each of the issuing corporations is liable in case of
default.
Bond Amortization and Retirement
There are three ways to redeem or retire a bond,

1. The company may issue another set of bonds equal to the amount
of bonds due for redemption.
2. The corporation may set up a sinking funds into which payments
are made periodically and usually of equal amounts.
3. The company may issue callable or serial bonds. These bonds
permit repayment of the principal on the certain bonds before
maturity.
Amortization of Bonded Debt
= 14,902.95

Amortization of Bonded Debt
Year Principal Interest at 8% No. of
bonds
retired
Amount
of
principal
repaid
Year-end
Payment
100,000 1 100,000 x 0.08 8,000 14 14 x 500 7,000
8,000
+7,000 15,000
2
100,000
- 7,000
93,000 93,000 x 0.08 7,440 15 7,500
14,940
Year Principal Interest at 8% No. of
bonds
retired
Amount
of
principal
repaid
Year-end
Payment
3 85,500 6,840 16 8,000 14,840
4 77,500 6,200 17 8,500 14,700
5 69,000 5,520 19 9,500 15,020
6 59,500 4,760 20 10,000 14,760
7 49,500 3,960 22 11,000 14,960
8 38,500 3,080 24 12,000 15,080
9 26,500 2,120 25 12,500 14,620
10 14,000 1,120 28 14,000 15,120
Totals
613,000 49,040 200 100,000 149,040
End