Exercise 92

1. What is meant by the capital of a corporation? 2. A share usually represents how much capital? 3. What is meant by the par value of a share? face value?

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4. Can you name some corporations doing business in your county?

5. State some advantages of a corporation over a partnership.

6. If X rents a house from Y for $30 a month, what is the income that Y receives called? If money is lent, what is the income from it called? What is the income from stocks called?

7. The income from stocks is reckoned as a per cent of what?

8. The Oswego Mercantile Company was organized with a capital stock of $20,000. A and B exchanged their drygoods business for $10,000 of this stock, of which A got and B. C, D, E, and F each took $2000 worth of stock, and G and H each took $1000. The stock was divided into shares of $100 each. How many shares did each stockholder receive?

9. At the end of the first year the stockholders received a 4% dividend. How much was that per share? How much dividend did each stockholder receive?

10. The average rate of the dividends for the first three years was 9%. How much income did A receive in the first three years? How much would he have received if he had lent his money at 6%? How much more did he gain by investing in the corporation? How much money must he have lent at 6% to receive as much income as he received from his stock? Was this stock a good investment? Can you name two things that must be true about an investment to make it a good investment?

11. With the dividends at 9% how much does C receive annually from his stock? That is 6% on how much money? Suppose that C offers to sell you his stock. How much can you afford to pay him so that you will receive 6% on the money invested, if the dividends continue the same?

12. Suppose that you pay C $120 a share for his stock. How much must you pay for all of C's stock at that rate? 13. The first year that you own the stock it pays a 6% dividend. How much is that a share? What per cent is that on the money paid for the stock? How much would you have received if you had lent the money at 6%? Which is better and by how much?

14. How much dividend must each share yield to pay you 8% on the money invested?

15. Suppose that during the second and third years that you own the stock, business is poor and The Oswego Mercantile Company pays only 3% dividends. Can you probably sell your stock for as much as you paid for it? What income would you get if your money were deposited in a savings bank at 3%? Would that be better than owning the stock?

16. What rate of dividend is paid when B receives $260 dividends annually?

17. If the net profits of this company are $1546.68 and a 7% dividend is paid, what surplus remains?

18. If The Oswego Mercantile Company pays an average annual dividend of 6%, how many shares of it are needed to bring as much income as $1200 worth of building and loan stock which pays 7% annually?

19. If the net profits of this company become small, say 2% a year, what effect will that have upon the selling price of the stock?

20. If it is thought that the company is likely to become bankrupt, what effect is that likely to have upon the selling price of the stock?

93. Bonds. When a corporation borrows money, it issues bonds. A bond is a promise of a corporation to pay a certain sum of money at a certain time with a certain rate of interest. A bond is simply the promissory note of a corporation.

Bonds are issued by various departments of the government, as the national government, the government of a state, a county, or a school district.

Bonds are usually secured by a mortgage on the property of the corporation.

The interest on bonds is paid annually, semi-annually, or quarterly, according to agreement.

The market value of bonds, like that of other property, rises and falls. The market value of bonds depends upon the rate of interest and the financial security of the corporation.

The name and address of the owner of a registered bond are registered at the offices of the corporation. When interest on a registered bond is due, it is sent directly to the owner.

A coupon bond has attached to it interest coupons, which are promises to pay interest. When interest is due, the owner of the bond detaches the coupon and presents it for payment.

94. Differences between stocks and bonds. Stocks represent money invested in the corporation. Bonds represent money lent to the corporation. The stockholders own the property of the corporation. The bondholders lend money to the corporation.

The income from stocks is dividends. Dividends are computed as a per cent of the par value of the stock. The amount of dividend varies with the amount of net profits. If there are no net profits, there are no dividends.

The income from bonds is interest. The rate of interest is fixed in the bond, and is a certain per cent of the face of the bond.

Interest on bonds must be paid before dividends on stocks.

95. Buying and selling stocks and bonds. We have seen that stock represents money invested in a corporation, and that bonds are like promissory notes.

Like other property stocks and bonds are bought and sold.. If stocks or bonds sell for more than par value, they are said to be above par. If they sell for less than par value, they are said to be below par. If they sell for par value they are said to be at par.

Thus, if a share of The Oswego Mercantile Company stock sells for $112, it is $12 above par; if it sells for $94, it is $6 below par; if it sells for $100, it is at par.

Just as there are persons who make a business of buying and selling dry-goods, or groceries, or grain, so there are persons who make a business of buying and selling stocks and bonds. A person whose business is the buying and selling of stocks and bonds is called a stock broker.

Stock brokers usually do their buying and selling in a stock exchange. Stock exchanges are found in certain large cities. The principal stock exchange in the United States is in New York City.

A broker usually charges % of the par value for buying and selling stocks and bonds. This is called brokerage.

The pupil should remember that the brokerage is always a per cent of the par value of the stocks or bonds that are bought or sold. If, for example, a broker receives 4% brokerage for buying 10 shares at $80 each, and also for buying 10shares at $127 each, par value in each case being $100, the brokerage is $1.25 in each case.

The price for which stock sells is called its market value. A report of the sales and the market prices of stocks and bonds may be found in the daily papers. Some quotations are given on the next page. Get a daily paper of some large city and find the stock quotations. These usually give the price offered, or bid, for stock, also the price asked by those wishing to sell stock.

The quotation, "American Express 1314," means that the stock of the American Express Company is selling for $131 a share. This is the market price.

The quotation," Lake Shore 4s 95g," means that one $100 bond of the Lake Shore Railroad, bearing 4% interest, is selling for $95§.

Men invest in farms, houses and lots, and other forms of property, hoping that the value of the property will increase, and that it will pay a good rate of income, as in rent. Investments are made in stocks and bonds for the same reasons.

If two investments are equally safe, the one paying the better rate of income is likely to cost the more. If a man is buying land to raise corn, he will pay more for an acre that will produce 60 bushels than for one that will produce only 30 bushels.

If two investments pay the same rate of income, the safer one may be expected to cost the more. If two bonds pay the same rate of interest, the one having the better security may be expected to bring the better price in the market.