The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

$0

$20

$10

$30

$40

$50

$60

$70

Stock price

Time

Zarofire Systems

Compound interest Actual price

Given the choice, it would be preferable to earn 21.90% compound interest instead of the

wilder ride offered by Zarofire’s stock. (Of course, that statement assumes that you could

find an investment paying a 21.90% compound interest rate.)

Volatility is less of an issue with illiquid stocks. It is certainly true that the value of

stock in Jason and Dave’s Dry Cleaning varies over time, but unless they are looking to

sell, neither owner is likely to be thinking about that on a daily basis. Even there, though, if

either owner is thinking about selling his shares in the business he would be wise to think

about doing this when things are going well and it is likely that his shares will command a

high price, rather than try to sell in an unfavorable business climate where the shares will

probably be much harder to sell at a good price.

While stock investments can be much more financially rewarding than other, safer in-

vestments, they carry much greater risks as well. People contemplating putting their money

to work in this way should make sure that they understand and can accept this risk and

volatility. (In the remaining sections of this chapter we will discuss alternative investments

as well as ways to balance and manage these risks.)

Percents should be rounded to two decimal places (when necessary). Dividend rates should be rounded to the nearest tenth

of a cent (where necessary).

A. Calculating Dividends

1. Metanational Globalnet Corp. has declared a dividend of 84 cents per share. How much will Mike receive if he owns
   257 shares of this stock?


2. Find the amount that the owner of 1,378 shares would receive if the corporation declared a dividend of 35 cents per
   share.


3. Cattarauqua Ginseng Enterprises is a corporation with 3,000 shares. For the current quarter, the company will pay out
   dividends totaling $37,560.

a. Find the dividend per share.

b. If Ray owns 1,445 shares, how much will he receive?

Copyright © 2008, The McGraw-Hill Companies, Inc.

Exercises 6.1 259

EXERCISES 6.1