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Solution Manual for Investments , Ninth Canadian Edition

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 1 - 1 CHAPTER 1: THE INVESTMENT ENVIRONMENT PROBLEM SETS : 1. While it is ultimately true that real assets determine the material well - being of an economy , financial innovation in the form of bundling and unbundling securities creates opportunities for investors to form more efficient portfolios. Both institutional and individual investors can benefit when financial engineering creates new products that allow them to manage their portfolios of financial assets more efficiently . B undling and unbundling create financial products with new properties and sensitivities to various sources of risk that allows investors to reduce volatility by hedging particular sources of risk more efficiently. 2. Securitization requires access to a large number of potential investors . To attract these investors, the capital market needs: 1. A safe system of business laws and low probability of confiscatory t axation/regulation; 2. A well - developed investment banking industry; 3. A well - developed system of brokerage and financial transactions ; and 4. A well - developed media, particularly financial reporting. These characteristics are found in (indeed make for) a well - developed financial market. 3. Securitization leads to disintermediation; that is, securitization provides a means for market participants to bypass intermediaries . For example, mortgage - backed securities channel funds to the housing market without requiring that banks or thrift institutions make loans from their own portfolios . Securitization works well and can benefit many, but only if the market for these securities is highly liquid. As securitization progresses, however, and financial intermediaries lose opportunities, they must increase other revenue - generating activities such as providing short - term liquidity to consumers and small business and financial services. 4. The existence of efficient capital markets and the liquid trading of financial assets make it easy for large firms to raise the capital needed to finance their investments in real assets . If Ford , for example, could not issue stocks or bonds to the general public, it would have a far more difficult time raising capital . Contraction of the supply of financial assets would make financing more difficult, thereby increasing the cost of capital . A higher cost of capital results in less investment and lower real growth. 5. Even if the firm does not need to issue stock in any particular year, the stock market is still important to the financial manager . The stock price provides important information about how the market values the firm's investment projects . For example, if the stock price rises considerably, managers might conclude that the market believes the firm's future prospects are bright . This might be a useful signal to the firm to proceed with an investment such as an expansion of the firm's business.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 1 - 2 In addition, shares that can be traded in the secondary market are more attractive to initial investors since they know that they will be able to sell their shares . This in turn makes investors more willing to buy shares in a primary offering and thus improves the terms on which firms can raise money in the equity market. Remember that stock exchanges like those in New York, Toronto, and London are the heart of capitalism, in which firms can raise capital quickly in primary markets because investors know there are liquid secondary markets. 6. a. No . The increase in price did not add to the productive capacity of the economy. b . Yes, the value of the equity held in these assets has increased . c . Future homeowners as a whole are worse off, since mortgage liabilities have also increased . In addition, this housing price bubble will eventually burst and society as a whole (and most likely taxpayers) will suffer the damage. 7 . a . Primary - market transaction in which gold certificates are being offered to public investors for the first time by an underwriting syndicate led by JW Korth Capital. b . The certificates are derivative assets because they represent an investment in physical gold, but each investor receives a certificate and no gold. Note that investors can convert the certificate into gold during the four - year period. c . Investors who wish to hold gold without the complication , risk, and cost of physical storage. 8 . a . A fixed salary means that compensation is (at least in the short run) independent of the firm's success . This salary structure does not tie the manager’s immediate compensation to the success of the firm , so a manager might not feel too compelled to work hard to maximize firm value. However, the manager might view this as the safest compensation structure and therefore value it more highly. b. A salary that is paid in the form of stock in the firm means that the manager earns the most when the shareholders’ wealth is maximized . Five years of vesting helps align the interests of the employee with the long - term performance of the firm. This structure is therefore most likely to align the interests of managers and shareholders . If stock compensation is overdone, however, the manager might view it as overly risky since the manager’s career is already linked to the firm, and this undiversified exposure would be exacerbated with a la rge stock position in the firm. c. A profit - linked salary create s great incentives for managers to contribute to the firm’s success . However , a manager whose salary is tied to short - term profits will be risk seeking, especially if these short - term profits determine salary or if the compensation structure does not bear the full cost of the project’s risks . Shareholders, in contrast, bear the losses as well as the gains on the project and might be less willing to assume that risk.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 1 - 3 9 . Even if an individual shareholder could monitor and improve managers’ performance and thereby increase the value of the firm, the payoff would be small, since the ownership share in a large corporation would be very small . For example, if you own $10,000 of Ford stock and can increase the value of the firm by 5%, a very ambitious goal, you benefit by only : 0.05  $10,000 = $500 . The cost, both personal and financial to an individual investor, is likely to be prohibitive and would typically easily exceed any accrued benefits, in this case $500. In contrast, an institutional investor holds a much larger position in the stock and as such, there is a greater payoff to monitoring the firm. A creditor , such as a bank that has a multimillion - dollar loan outstanding to the firm , has a big stake in making sure that the firm can repay the loan . It is clearly worthwhile for the bank to spend considerable resources to monitor the firm. 1 0 . Mutual funds accept funds from small investors and invest, on behalf of these investors, in the domestic and international securities markets. Pension funds accept funds and then invest in a wide range of financial securities , on behalf of current and future retirees, thereby channeling funds from one sector of the economy to another. Venture capital firms pool the funds of private investors and invest in start - up firms. Banks accept deposits from customers and loan those funds to businesses or use the funds to buy securities of large corporations. 1 1 . Treasury bills serve a purpose for investors who prefer a low - risk investment . The lower average rate of return compared to stocks is the price investors pay for predictability of investment performance and portfolio value. 1 2 . With a top - down investing style , you focus on asset allocation or the broad composition of the entire portfolio, which is the major determinant of over all performance . Moreover, top - down management is the natural way to establish a portfolio with a level of risk consistent with your risk tolerance . The disadvantage of an exclusive emphasis on top - down issues is that you may forfeit the potential high returns that could result from identifying and concentrating in undervalued securities or sectors of the market. With a bottom - up investing style , you try to benefit from identifying undervalued securities . The disadvantage is that investors might tend to overlook the overall composition of your portfolio, which may result in a non - diversified portfolio or a portfolio with a risk level inconsistent with the appropriate level of risk tolerance . In addition, this technique tends to require more active management, thus generating more transaction costs . Finally, the bottom - up analysis may be incorrect, in which case there will be a fruitlessly expended effort and money attempting to beat a simple buy - and - hold strategy. 1 3 . You should be skeptical . If the author actually knows how to achieve such returns, one must question why the author would then be so ready to sell the secret to others . Financial markets are very competitive; one of the implications of this fact is that riches do not come easily . High expected returns require bearing some risk, and obvious bargains are few and far between . Odds are that the only one getting rich from the book is its author.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 1 - 4 1 4 . Financial a ssets provide for a means to acquire real assets as well as an expansion of these real assets . Financial assets provide a measure of liquidity to real assets and allow for investors to more effectively reduce risk through diversification. 1 5 . Allowing traders to share in the profits increases th e traders’ willingness to assume risk . Traders will share in the upside potential directly in the form of higher compensation but only in the downside indirectly in the form of potential job loss if performance is bad enough. This scenario creates a form of agency conflict known as moral hazard, in which the owners of the financial institution share in both the total profits and losses, while the traders will tend to share more of the gains than the losses. 1 6 . Answers may vary; however, students should touch on the following: increased transparency, regulations to promote capital adequacy by increasing the frequency of gain or loss settlement, incentives to discourage excessive risk taking, and the promotion of more accurate and unbiased risk assessment .

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 1 CHAPTER 2: FINANCIAL MARKETS, ASSET CLASSES, AND FINANCIAL INSTRUMENTS PROBLEM SETS: 1. Money market securities are called “cash equivalents” because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs. 2. a. 𝑟 ஻ா௒ = ଵ0 , 000 ି ௉ ௉ × 365 ௡ 𝑟 ஻ா௒ = ଵ0 , 000 ି ଽ , 600 ଽ600 × 365 ଵ82 = . 083562 , 𝑜𝑟 8 . 36% b. One reason is that the discount yield is computed by dividing the dollar discount from par by the par value, $10,000, rather than by the bill’s price, $9,600. A second reason is that the discount yield is annualized by a 360 - day rather than a 365 - day year. 3. P = $1,000 [1 – r BD ( n /360)] where r BD is the discount yield. P ask = $1,000[1 – .0681(60/360)] = $988.65 P bid = $1,000 [1 – .0690(60/360)] = $988.50 4. r BEY =   P P 000 , 1 365 n =   65 . 988 65 . 988 000 , 1 365 60 = 6.98%, which exceeds the discount yield, r BD = 6.81%. To obtain the effective annual yield, r EAY , note that the 60 - day growth factor for invested funds is 65 . 988 000 , 1 = 1.01148. Annualizing this growth rate results in 1 + r EAY = ( 65 . 988 000 , 1 ) 365/60 = 1.0719 which implies that r EAY = 7.19%. 5. According to equation 2 . 2:

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 2 P = $10,000/[1 + r BEY × ( n /365)] P = $10,000/[1 + 0.05 × (91/365)] = $ 9,876.88. 6. a. i. 1 + r = ($10,000/$9,764) 4 = 1.1002 r = 10.02% ii. 1 + r = ($10,000/$9,539) 2 = 1.0990 r = 9.90% The three - month bill offers a higher effective annual yield. b. i. r BD =   000 , 1 4 . 976 000 , 1 360 91 = 0.0934 = 9.34% ii. r BD =   000 , 1 9 . 953 000 , 1 360 182 = 0.0912 = 9.12% 7. a. Price = $1,000 × [1 – 0.03 × 90 360 ] = $992.5 b. 90 - day return = 5 . 992 5 . 992 000 , 1  = 0.007557 = 0.7557% c. r BEY = 0.7557% × 365 90 = 3.06% d. Effective annual yield = (1.007557) 365/90 – 1 = 0.0310 = 3.10% 8. The bill has a maturity of one half - year, and an annualized discount of 9.18%. Therefore, its actual percentage discount from par value is 9.18% × 1/2 = 4.59%. The bill will sell for $100,000 × (1 – 0.0459) = $95,410. 9. The total before - tax income is $4. Since the dividend income is fully excluded from taxable income, the after - tax income is also $4, for a rate of return of 10%. 10. a. The index at t = 0 is ($60 + $80 + $20)/3 = $53.33. At t = 1, it is ($70 + $70 + $25)/3 = $55, for a rate of return of 3.13%. b.

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 3 Stock Q P 0 Market Value P 1 Market Value A 200 $60 $12,000 $70 $14,000 B 500 $80 $40,000 $70 $35,000 C 600 $20 $12,000 $25 $15,000 The index at t = 0 is ($12,000 + $40,000 + $12,000)/100 = 640. At t = 1, it is also 640, so the rate of return is zero. c. Before Splits After Splits Stock P 0 Q P 0 Q P 1 A $60 200 $30 400 $35 B $80 500 $20 2,000 $17.5 C $20 600 $20 600 $25 After the splits the index has to remain unchanged so the divisor (which initially was 3) has to be reset. The sum of the three prices after the split is 70, while the index value before splits was 53.33. Therefore $70/ d = 53.33 and the new divisor must be 1.3125. The index at t = 1 is ($35 + $17.5 + $25)/1.3125 = 59.05 for a return of 10.71%. d. The total market value of A and B as well as that of the market remain unchanged after the two splits so that the return on the value - weighted index is not affected by the splits (and it is zero). 11. a. The index at t = 0 is ($90 + $50 + $100)/3 = 80. At t = 1, it is $250/3 = 83.333, for a rate of return of 4.17%. b. In the absence of a split, stock C would sell for 110, and the index would be 250/3 = 83.333. After the split, stock C sells at 55. Therefore, we need to set the divisor d such that 83.333 = (95 + 45 + 55)/ d , meaning that d = 2.34. c. The return is zero. The index remains unchanged, as it should, since the return on each stock separately equals zero. 12. a. Total market value at t = 0 is ($9,000 + $10,000 + $20,000) = $39,000. Market value at t = 1 is ($9,500 + $9,000 + $22,000) = 40,500. Rate of return = $40,500/$39,000 – 1 = 3.85%. b. The return on each stock is as follows: r A = 95/90 – 1 = 0.0556 r B = 45/50 – 1 = – 0.10 r C = 110/100 – 1 = 0.10 The equally - weighted average is 0.0185 = 1.85%

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 4 13. a. The higher coupon bond. b. The call with the lower exercise price. c. The put on the lower priced stock. d. The bill with the lower yield. 14. Preferred stock is like a long - term debt in which it typically promises a fixed payment each year. In this way, it is a perpetuity. Preferred stock, also, does not give the holder voting rights in the firm.

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 5 Preferred stock is like equity in which the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not set off corporate bankruptcy. With respect to the priority of claims to the assets of the firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds. 15. Value of call at expiration – Initial cost = Profit a. $0 $4 $ – 4 b. $0 $4 $ – 4 c. $0 $4 $ – 4 d. $5 $4 $ 1 e. $10 $4 $ 6 Value of put at expiration – Initial cost = Profit a. $10 $6 $ 4 b. $5 $6 $ – 1 c. $0 $6 $ – 6 d. $0 $6 $ – 6 e. $0 $6 $ – 6 16. There is always a chance that the option will be in the money at some point prior to expiration. Investors will pay something for this chance of a positive payoff. 17. A call option conveys the right to buy the underlying asset at the exercise price. A long position in a futures contract carries an obligation to buy the underlying asset at the futures price. 18. A put option conveys the right to sell the underlying asset at the exercise price. A short position in a futures contract carries an obligation to buy the underlying asset at the futures price. 19. Individual response. However, on the day that we tried this experiment, 18 of the 25 stocks met this criterion, leading us to conclude that returns on stock investments can be quite volatile. 20. The spread will widen. Deterioration of the economy increases credit risk, that is, the likelihood of default. Investors will demand a greater premium on debt securities subject to default risk. 21. a. Because the stock price exceeds the exercise price, you will choose to exercise. The payoff on the option will be $41  $39 = $2. The option originally cost $1.35, so the gain is $2.00  $1.35 = $0.65. Since the contracts are for 100 shares, your gain is $65.00.

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    Bodie et al. Investments 9th Canadian Edition Solutions Manual 2 - 6 b. If the exercise price were $40, and the stock price $39, you would not exercise. The loss on the call would be the initial cost, which was $0.59. Your total loss is therefore $59.00 . c. If the put has an exercise price of $42, you would not exercise for any stock price of $42 or above. The loss on the put would be the initial cost, which was $1.88*100=$188.00. With a share price of $40, the put would be exercised for a gain of $2 ($42 – $ 40) which would give a profit of $12.00 (($2 gain – $1.88 cost)*100) . 22. a. Aecon closed at $17.81. b. Assuming that you buy at the closing price, you could buy $5,000/$17.81 = 280 shares . c. The dividend is 2.8% of $17.81, which is probably an annual amount of $.50; your dividend income would be 28 0  $ .50 = $140 annually. d. The price - to - earnings ratio is 25.8, and price is $17.81. Therefore, Earnings (E.P.S.) = $17.81/25.8  E.P.S. = $0.69 2 3 . a. You bought the contract when the futures price was 885.5 (see Figure 2. 12). The contract closes at a price of $900, which is $14.5 higher than the original futures price. The contract multiplier is 200. Therefore, you will incur a gain of $14.5  200 = $2,900. b. Open interest on the index is 240,890 contracts. 2 4 . d 25. a. Writing a call entails unlimited potential losses as the stock price rises.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 3 - 1 CHAPTER 3 : HOW SECURITIES ARE TRADED PROBLEM SETS : 1. Individual solution — answers to this problem will vary. 2. a. In principle, potential losses are unbounded, growing directly with increases in the price of Alcan. b. If the stop - buy order can be filled at $78, the maximum possible loss per share is $8. If Alcan’s shares go above $78, the stop - buy order is executed, limiting the losses from the short sale. 3. a. The stock is purchased for 300  $40 = $12,000. Borrowed funds are $4,000. Therefore, the investor put up equity or margin of $8,000. b. If the share price falls to $30, the value of the stock falls to $9,000. The amount of the loan owed to the broker grows to $4,000  1.08 = $4,320. Therefore, remaining margin is $ 9,000  $ 4,320 = $4,680. The percentage margin is now $ 4,680/ $ 9,000 = 0 .52 = 52% , so there will not be a margin call. c. The rate of return on investment over the years is (Ending value of account  Initial equity)/Initial equity = ( $ 4,680  $ 8,000)/ $ 8,000 =  0 .415 =  41.5%. 4. a. The initial margin was 0 .50  1,000  $40 = $20,000. The firm loses $10  1,000 = $10,000 due to the increase in the stock price so margin falls by $10,000. Moreover, the firm must pay the dividend of $2 per share, which means the margin account falls by an additional $2,000. So the remaining margin is $8,000 . b. The percentage margin is $8,000/$50,000 = 0 .16 = 16% , so there will be a margin call. c. The margin in the account fell from $20,000 to $8,000 in one year, for a rate of return of  $12,000/$20,000 =  0 .60 =  60%. 5. The stop - loss order will be executed as soon as the stock price hits the limit price. If the stock price later rebounds, the investor does not participate in the gains because the stock has been sold. In contrast, the put option need not be exercised when the stock

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 3 - 2 price falls below the exercise price. An investor who owns a share of stock and a put option can hold on to both securities. If the stock price never rebounds, the put can be exercised eventually, and the stock sold for the exercise price. This provides the same downside protection as the stop - loss order. If the price does rebound, however, the investor benefits because the stock is still held. This advantage of the put over the stop - loss order justifies the cost of the put. 6. Calls are options to purchase a stock at any time prior to expiration. Stop - buys require purchase as soon as the stock price hits the limit. The advantage of the call over the stop - buy is that the investor need not commit to buying until expiration. If the stock price later falls, the holder of the call can choose not to purchase. 7. The broker is to attempt to sell Barri c k stock as soon as a sale takes place at a price of $38 or less. Here, the broker will attempt to execute if a sale takes place at the bid price, but may not be able to sell at $38, since the bid price is now $37.80. 8. The broker is instructed to attempt to sell your Kin r oss stock as soon as the Kin r oss stock trades at a bid price of $38 or less. Here, the broker will attempt to execute, but may not be able to sell at $38, since the bid price is now $37.85. The price at which you sell may be more or less than $38 because the stop - loss becomes a market order to sell at current market prices. If the bid has sufficient quantity you are likely to get $37.85, however. 9. a. The buy order will be filled at the best limit - sell order, $50.25. b. At the next - best price, $51.50. c. You should increase your position. There is considerable buy pressure at prices just below $50, meaning that downside risk is limited. In contrast, sell pressure is sparse, meaning that a moderate buy order could result in a substantial price increase. 10. The system expedites the flow of market orders or limit orders from exchange members to the specialists. It allows members to send computerized orders directly to the floor of the exchange, which allows the nearly simultaneous sale of each stock in a large portfolio. This capability is necessary for program trading. 11. The dealer (or market maker) . Spreads should be higher on inactive stocks and lower on active stocks. 12. Cost of purchase is $80 × 250 = $20,000. You borrow $5,000 from your broker, and invest $15,000 of your own funds. Your margin account starts out with a net worth of $15,000. a. (i) Net worth rises by $2,000 from $15,000 to $88 × 250 – $5,000 = $17,000. Percentage gain = $2,000/$15,000 = 0 .1333 = 13.33%

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 3 - 3 (ii) With unchanged price, net worth remains unchanged. Percentage gain = zero (iii) Net worth falls to $72 × 250 – $5,000 = $13,000. Percentage gain = – $2 , 000 $15 , 000 = – 0 .1333 = – 13.33% The relationship between the percentage change in the price of the stock and the investo r’s percentage gain is given by : % gain = % change in price × Total investment Investor’s initial equity = % change in price × 1.333 For example, when the stock price rises from $ 80 to $ 88, the percentage change in price is 10%, while the percentage gain for the investor is 1.333 times as large, 13.33%: % gain = 10% × $20 , 000 $15 , 000 = 13.33% b. The value of the 250 shares is 250 P . Equity is 250 P – $ 5 , 000. You will receive a margin call when P P 250 000 , 5 250  = 0 .3 or when P = $28.57 c. The value of the 250 shares is 250 P . But now you have borrowed $10,000 instead of $5,000. Therefore, equity is only $ 250 P – $10,000. You will receive a margin call when 3 . 250 000 , 10 250   P P or when P = $57.14 With less equity in the account, you are far more vulnerable to a margin call. d. The margin loan with accumulated interest after one year is $5,000 × 1.08 = $5,400. Therefore, equity in your account is $ 250 P – $5,400. Initial equity was $15,000. Therefore, your rate of return after one year is as follows: (i) 000 , 15 $ 000 , 15 $ ) 400 , 5 $ 88 $ 250 (    = 0 .1067, or 10.67%.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 3 - 4 (ii) 000 , 15 $ 000 , 15 $ ) 400 , 5 $ 80 $ 250 (    = – 0 .0267, or – 2.67%. (iii) 000 , 15 000 , 15 $ ) 400 , 5 $ 72 $ 250 (    = – 0 .160, or – 16.0%. The relationship between the percentage change in the price of Intel and investor’ s percentage return is given by % gain = % change in price × Total investment Investor’s initial equity – 8% × Funds borrowed Investor’s initial equity For example, when the stock price rises from $ 80 to $ 88, the percentage change in price is 10%, while the percentage gain for the investor is % gain = 10% × 20 , 000 15 , 000 – 8% × 5000 15 , 000 = 10.67% e. The value of the 250 shares is $ 250 P . Equity is $ 250 P – $ 5,400. You will receive a margin call when P P 250 400 , 5 250  = 0 .3 or when P = $30.86 13. a. The gain or loss on the short position is ( – 250 ×  P ). Invested funds are $15,000. Therefore, rate of return = ( – 250 ×  P )/ $ 15,000. The returns in each of the three scenarios are (i) Rate of return = ( – 250 × $ 8)/ $ 15,000 = – 0 .1333 = – 13.33% (ii) Rate of return = ( – 250 × $ 0)/ $ 15,000 = 0 (iii) Rate of return = [ – 250 × ( – $ 8)]/ $ 15,000 = + 0 .1333 = +13.33% b. Total assets in the margin account are $20,000 (from the sale of the stock) + $15,000 (the initial margin) = $35,000; liabilities are $ 250 P . A margin call will be issued when P P 250 250 000 , 35  = .30, or when P = $107.69. c. (aa.) With a $2 dividend, the short position must also pay $2/share × 250 shares = $500 on the borrowed shares. Rate of return will be ( – 250 ×  P – $ 500)/ $ 15,000.

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    Bodie et al. Investments 9 th Canadian Edition Solutions Manual 3 - 5 (i) Rate of return = ( – 250 × $ 8 – $ 500)/ $ 15,000 = – 0 .16 6 7 = – 16. 6 7% (ii) Rate of return = ( – 250 × $ 0 – $ 500)/ $ 15,000 = – 0 .033 = – 3.33% (iii) Rate of return = [ – 250 × ( – $ 8) – 500]/ $ 15,000 = + 0 .100 = +10.0% (bb.) Total assets (net of the dividend repayment) are $35,000 – $ 500, and liabilities are $ 250 P . A margin call will be issued when 35 , 000 – 500 – 250 P 250 P = 0 .30, or when P = $106.15 14. a. The trade will be executed at the price of $55.50 . b. The trade will be executed at the price of $55.25 . c. The trade will not be executed since the bid price is less than the price on the limit sell order. d. The trade will not be executed since the asked price is greater than the price on the limit buy order. 15. The proceeds from the short sale (net of commission) were $14 × 100 – $50 = $1,350. A dividend payment of $200 was withdrawn from the account. Coverage at $9 cost you (including commission) $900 + $50 = $950, leaving you with a profit of $1350 – $200 – $950 = $200. Note that your profit, $200, equals 100 shares × profit per share of $2. Your net proceeds per share were: $14 sales price of stock – $ 9 repurchase price of stock – $ 2 dividend per share – $ 1 2 trades × $.50 commission per share on each trade. ––––––– $ 2 16. a. You buy 200 shares of BCE. These shares increase in value by 10%, or $1000. You pay interest of .08 × $ 5,000 = $400. The rate of return will be 1000 – 400 5000 = 0 .12, or 12%. b. The value of the 200 shares is 200 P . Equity is 200 P – $ 5,000. You will receive a margin

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