The Mathematics of Finance

Simple Interest
Simple Interest
• A fixed percentage of the principal (the total amount invested) paid to a depositor or an investor each
year the principal is left on deposit or has been invested; usually denoted by 𝐼
• Fixed amount paid to a bank or any lender (one who gives money to a borrower) each year the principal
has been borrowed
• Formula: 𝑆𝑆𝑆𝑚𝑝𝑙𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑃𝑟𝑆𝑆𝑛𝑐𝑆𝑆𝑝𝑎𝑙 𝑥 𝑅𝑎𝑡𝑒 𝑥 𝑇𝑆𝑆𝑚𝑒 or simply 𝐼 = 𝑃𝑟𝑡
Where:
𝐼 - Simple Interest
𝑃 - Principal
𝑟 - Rate
𝑡 - Time

Then the final amount or Maturity value (𝐹) at the end of 𝑡 years can be solved using
𝐹 =𝑃+𝐼
Derived Formulas
𝐼
1. 𝑃 =
𝑟𝑡
𝐼
2. 𝑟 =
𝑃𝑡
𝐼
3. 𝑡 =
𝑃𝑟
4. 𝐹 = 𝑃 + 𝐼
= 𝑃 + 𝑃𝑟𝑡
𝐹 = 𝑃(1 + 𝑟𝑡)

Example 1: If ₱1,500 was borrowed at 8% simple interest, how much will the interest be for 2 years?
Given: 𝑃 = ₱1,500; 𝑟 = 8% 𝑜𝑟 .08; 𝑡 = 2 years
Find: 𝐼

Example 2: If ₱300 is the interest at 9% after 4 months, how much was borrowed?
4 1
Given: 𝐼 = ₱300; 𝑟 = 9% 𝑜𝑟 .09; 𝑡 = 𝑜𝑟 year
12 3
Find: 𝑃

Example 3: If ₱1,912.50 is the interest for investing ₱9,000 for 2 years and 6 months, find the rate of interest.
Given: 𝐼 = ₱1,912.50; 𝑃 = ₱9,000; 𝑡 = 2.5 years
Find: 𝑟

Example 4: Accumulate ₱8,000 for 1 year and 6 months at 10% simple interest.
Given: 𝑃 = ₱8,000; 𝑡 = 1.5 years;𝑟 = 10% 𝑜𝑟 .1
Find: 𝐹
Simple Discount
Discount 𝐷 is a deduction from maturity amount 𝐹 of an obligation allowed for paying it currently. The formula
is 𝐷 = 𝐹𝑑𝑡, where:
𝐷 − discount
𝐹 − amount of maturity
𝑑 − discount rate
𝑡 − time or term of discount

To find 𝑃, use 𝑃 = 𝐹 − 𝐷 or
𝑃 = 𝐹(1 − 𝑑𝑡)
Derived Formulas are
𝐷 𝐷 𝐷
𝑑 = ; 𝑡 = ; and 𝐹 =
𝐹𝑡 𝐹𝑑 𝑑𝑡

Example:
Find the present value of ₱2,000, which is due at the end of 90 days at 5% simple discount. Given:
1
𝐹 = ₱2,000; 𝑡 = ; 𝑑 = .05
4

Actual Time
This is the actual number of days between two (2) dates.

Approximate Time
This method considered that there were 30 days in each month or 360 days in one (1) year.

Example 1: A note dated February 28 is due to be paid August 1. How many days will the note run?

Example 2: Find the due date for a 130-day note dated July 7.

Example 3: Determine the actual time and approximate time from March 3, 2015 to September 10, 2015.
Ordinary and Exact Interest
Exact Interest denoted by 𝐼𝑒 , is a type of simple interest computed based on 365 days, that is, the exact number
𝟏𝟏
of days in a year. In other words, the time 𝑡 for 1 day is 𝑡 = year.
𝟑𝟑𝟑𝟑𝟑𝟑
𝑑𝑎𝑦𝑠
𝐼𝑒 = Pr
365
Ordinary Interest denoted by 𝐼𝑜 , is a type of interest computed based on 360 days, that is, assuming each month
1
in a year has 30 days. In other words, the time 𝑡 for 1 day is 𝑡 = year.
360
𝑑𝑎𝑦𝑠
𝐼𝑜 = Pr
360

Example 1: Find the interest on ₱28, 700 at 7.3% from March 14, 2016 to August 16, 2016 using the following:
a. ordinary interest using actual time c. exact interest using actual time
b. ordinary interest using approximate time d. exact interest using approximate time

Solution:
Given: 𝑃 = ₱28,700 𝑟 = 7.3% = 0.073

The first step is to determine the approximate time and actual time of the term, then compute for the ordinary
interest and exact interest.
Month Actual Time Approximate Time
March 14, 2016 31-14=17 30-14=16
April 30 30
May 31 30
June 30 30
July 31 30
August 16, 2016 16 16
Total 155 152

a. Ordinary Interest using Actual Time: 𝑡 = 155 days

𝐼 = 𝑃𝑟𝑡
155
𝐼 = 28,700(0.073) � �
360
𝐼 = ₱902.06

b. Ordinary Interest using Approximate Time: 𝑡 = 152 days

𝐼 = 𝑃𝑟𝑡
155
𝐼 = 28,700(0.073) � �
360
𝐼 = ₱884.60

c. Exact Interest using Actual Time: 𝑡 = 155 days

𝐼 = 𝑃𝑟𝑡
155
𝐼 = 28,700(0.073) � �
365
𝐼 = ₱889.70

d. Exact Interest using Approximate Time: 𝑡 = 155 days

𝐼 = 𝑃𝑟𝑡
155
𝐼 = 28,700(0.073) � �
365
𝐼 = ₱872.48
Compound Interest
Compound Interest is interest computed on the sum of the original principal of a deposit or loan and the interest
accumulated. It is denoted by 𝐼𝑐 .

Computing for the Total Number of Conversion Periods

When the interest rate is compounded annually, interest is computed once a year. Thus, one (1) conversion
period is equivalent to one (1) year.

The frequency of conversion, denoted by 𝑚, is the number of times that the interest is computed in the span
of one (1) year. The time or the number of years of the term compounded interest is denoted by 𝑡. Thus, the
total number of conversion periods for the entire term, denoted by 𝑛, is the product of the number of years 𝑡 and
the frequency of conversion 𝑚.
𝑛 = 𝑡𝑚
The following table shows the different values of 𝑛 given a particular frequency conversion 𝑚 and time 𝑡.

Total Number of Conversions for the Entire Term at Various Conversion Periods
Frequency of
Description Conversion Period Time (𝑡) Conversion (𝑚) Value of 𝑛
Annually 1 year 1 year 1 1
Semiannually 6 months 3 years 2 6
Quarterly 3 months 2 years 4 8
Monthly 1 month 5 years 12 60

The value of 𝑛 (total number of conversions for the entire term) is dependent of 𝑚 (frequency of conversion). If
the term 𝑡 is kept constant, 𝑛 increases as 𝑚 increases. Similarly, 𝑛 is also dependent on 𝑡. If 𝑚 is held constant,
𝑛 increases at 𝑡 increases.

Computing Interest Rates per Period

Suppose you want to know how much the interest rate per period is for compound interest charged on a
particular loan or investment. How do you get this value?

First, determine the nominal rate, or the rate charge that may be converted several times per year, say
semiannually. This type of rate is denoted by 𝑗𝑗. For example, you are investing ₱36,000 for 5 years in a bank
that pays 3% compounded semiannually. The nominal rate 𝑗𝑗 is 3% or 0.03.

Now, to get the interest per period, denoted by 𝑆𝑆, divide the nominal rate by the frequency of conversion per
year as follows:
𝑗𝑗
𝑆𝑆 =
𝑚
The following table shows the different interest rates per period given a particular nominal rate:

Interest Rate per Period for Various Conversion Periods

Frequency of Interest Rate per
Description Interest Period Conversion (𝑚) Nominal Rate (𝑗𝑗) Period (𝑆𝑆)
Annually 1 year 1 10% 10% or 0.10
Semiannually 6 months 2 12% 6% or 0.06
Quarterly 3 months 4 14% 3.5% or 0.035
Monthly 1 month 12 16% 1.33% or 0.0133
The accumulated value of the principal 𝑃 at the end of the term is called the compound amount, denoted by
the variable 𝐹.

The formula for compound amount at the end of 𝑛 periods is given by

𝐹 = 𝑃(1 + 𝑆𝑆)𝑛
Where:
• 𝐹 is the compound amount or accumulated value of the principal 𝑃 at the end of the term
 • 𝑃 is the present value or original principal
• 𝑆𝑆 is the interest rate per period
• 𝑛 is the total number of conversions periods.

Example 1
If Mrs. De Leon invested ₱12,900 for 4 years in a bank that pays 3% compounded semiannually, how much will
she receive after 4 years?
Given: 𝑃 = ₱12,900; 𝑡 = 4 years; 𝑚 = 2; 𝑗𝑗 = 0.03
Solution: First solve for 𝑆𝑆 and 𝑛.
𝑗𝑗 0.03
𝑆𝑆 = = = 0.015 and 𝑛 = 𝑡𝑚 = 4(2) = 8
𝑚 2
Since the total number of conversion periods in 4 years is 8 and the interest rate per period is 1.5% or 0.015, it
follows that
𝐹 = 𝑃(1 + 𝑆𝑆)𝑛
= (₱12,900.00)(1 + 0.015)8
= ₱14,531.75.
Mrs. De Leon will receive ₱14,531.75 after 4 years.

Computing Compound Interest

Compound interest is the total interest earned for the entire term. You can obtain it by getting the difference
between the compound amount 𝐹 and the principal or present value 𝑃.
𝐼𝑐 = 𝐹 − 𝑃
Example 2
Refer to the previous example. How much interest will Mrs. De Leon’s investment earn?
Given: 𝑃 = ₱12,900.00; 𝐹 = ₱14,531.75
Solution: The compounded interest is computed as
𝐼𝑐 = 𝐹 − 𝑃
= ₱14,531.75 − ₱12,900.00
= ₱1,631.75.
Mrs. De Leon’s investment will earn total interest of ₱1,631.75 after 4 years.

Example 3
Find the compound interest earned at the end of 20 months if ₱150,000 is invented in a fund that pays 20%
compounded monthly.
Given: 𝑃 = ₱150,000; 𝑗𝑗 = 20% 𝑜𝑟 0.2; 𝑚 = 12; 𝑡 = 20 months’
Solution: First solve for the interest rate per period.
𝑗𝑗
𝑆𝑆 =
𝑚
0.2
=
12
� 6� 6�
= 0.016
20
Next, solve for the total number of conversion periods. Note that 𝑡 = 20 months means 𝑡 = years.
12
𝑛 = 𝑡𝑚
20
= � � (12)
12
= 20
Compute the compound amount.
𝐹 = 𝑃(1 + 𝑆𝑆)𝑛
= ₱150,000(1 + 0.01666)20
= ₱208,767.53
Lastly, compute for the compound interest.
𝐼𝑐 = 𝐹 − 𝑃
= ₱208,767.53 − ₱150,000
= ₱58,767.53
The compounded interest earned for ₱150,000.00 invested in a fund that pays 20% compounded monthly at
the end of 20 months is ₱58,767.53.

Example 4
Accumulate ₱30,000 for 3 years and 6 months at 16% compounded semiannually.Given:
6
𝑃 = ₱30,000; 𝑡 = 3 years;12𝑗𝑗 = 16% (𝑚 = 2)
Solution: To accumulate means to find the compound amount. First, solve for the interest per period.
𝑗𝑗 0.16
𝑆𝑆 = = = 0.08
𝑚 2
Next, solve for the total number of conversion periods.
6
𝑛 = 𝑡𝑚 = �3 𝑦𝑒𝑎𝑟𝑠� (2) = (3.5)(2) = 7
12
Compute the compound amount.
𝐹 = 𝑃(1 + 𝑆𝑆)𝑛
𝐹 = ₱30,000.00(1 + 0.08)7 = ₱51,414.73
1
The compound amount at the end of 3 years of ₱30,000.00 invested at 16% (m=2) is ₱51,414.73.
2

Example 5
3
If ₱1.5 million is invested in a fund that pays 23 % compounded monthly for 10 years and 8 months, how much
4
will be in the fund at the end of the term?
3
Given: 𝑃 = ₱1,500,000 𝑗𝑗 = 23 %
4
𝑚 = 12 𝑡 = 10 years and 8 months
Solution: First, solve for the interest per period 𝑆𝑆.
3
𝑗𝑗 23 4 % 23.75% 0.2375
𝑆𝑆 = =
𝑚 12 = 12 = 12 = 0.01979
Next, solve for the total number of conversion periods.
8
𝑛 = 𝑡𝑚 = �10 � (12) = 128
12
Compute the compound amount.
𝐹 = 𝑃(1 + 𝑆𝑆)𝑛
𝐹 = ₱1,500,000.00(1 + 0.01979)128
𝐹 = ₱18,431,385.42
3
If ₱1.5 million is invested for 10 years and 8 months in a fund that pays 23 % compounded monthly, the
4
compound amount at the end of the term is ₱18,431,385.42.

Present Value and Compound Interest

Present Value refers to the value of a certain sum of money at the present time.
𝐹
𝑃 = 𝑜𝑟 𝑃 = 𝐹(1 + 𝑆𝑆)−𝑛
(1 + 𝑆)
where
• 𝑃 is the present value
• 𝐹 is the future value or compound amount
• 𝑆𝑆 is the interest per period
• 𝑛 is the total number of conversion periods

Example 6
What is the present value of ₱35,000 due in 7 years and 6 months if the rate is 12% compounded quarterly?
Given: 𝐹 = ₱35,000; 𝑡 = 7 𝑦𝑒𝑎𝑟𝑠 𝑎𝑛𝑑 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝑜𝑟 7.5 𝑦𝑒𝑎𝑟𝑠; 𝑗𝑗 = 12% = 0.12; 𝑚 = 4
Solution: Solve for 𝑆𝑆 and 𝑛.
𝑗𝑗 0.12
𝑆𝑆 = = = 0.03
𝑚 4
𝑛 = 𝑡𝑚 = (7.5)(4) = 30
Substitute the values of 𝐹, 𝑆𝑆, and 𝑛 in the formula for 𝑃.
 𝐹 ₱35,000
𝑃= = = ₱14,419.54
(1 + 𝑆𝑆)𝑛(1 + 0.03)30
Another way to solve the problem is by using the equivalent formula for 𝑃,
𝑃 = 𝐹(1 + 𝑆𝑆)−𝑛
= ₱35,000(1 + 0.03)−30
= ₱35,000(1.03)−30
= ₱14,419.54
The present value of ₱35,000.00 that is due at the end of 7.5 years is ₱14,419.54.

Example 7
A certain principal 𝑃 was invested at 6% compounded semiannually. If this principal amounted to ₱94,500 at
the end of 3 years, how much was the principal? Find the compound interest earned.
Given: 𝐹 = ₱94,500; 𝑡 = 3 𝑦𝑒𝑎𝑟𝑠; 𝑗𝑗 = 6% 𝑜𝑟 0.06; 𝑚 = 2
Solution: Solve first for 𝑆𝑆 and 𝑛.
𝑗𝑗 0.06
𝑆𝑆 = = = 0.03
𝑚 2
𝑛 = 𝑡𝑚 = (3)(2) = 6
Use the values of 𝐹, 𝑆𝑆 and 𝑛 to solve for 𝑃.
𝑃 = 𝐹(1 + 𝑆𝑆)−𝑛
= ₱94,500.00(1 + 0.03)−6
= ₱79,142.26
The compound interest 𝐼𝑐 is then computed as
𝐼𝑐 = 𝐹 − 𝑃
= ₱94,500.00 − ₱79,142.26
= ₱15,357.74
The present value of ₱94,500.00 that is due at the end of 3 years is ₱79, 142.26. The compounded interest that
the investment earned is ₱15,357.74.

Stocks and Bonds

Stocks
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the
corporation’s assets and earnings. Stocks are classified into two (2) types: the common stock and the preferred
stock.

In the Philippines, stocks are traded regularly at various marketplaces such as Philippines Stock Exchange
(PSE) and Market Stock Exchange (MSE). These are places where an investor can buy or sell stocks through
a licensed broker authorized to transact business in the market stock places.

Bonds
A bond is a certificate or a written contract in which the debtor promises to pay its holder a specified amount of
money, plus a certain rate of interest at a stated future date.

A company that needs money can borrow from investors by selling bonds. A bond is a debt covering a long
term such as 10, 20 or more years. The investor is the bondholder who is guaranteed to be repaid at a specified
future date.

Typical bonds which are issued in various denominators are payable at par value or face value at maturity date.
The par value or face value is the principal borrowed as stated in the bond.

The par value is usually the price the investor pays when buying the bond from the issuing company. An investor
may sell the bond at any time to another investor.

Bonds are traded among investors. Hence, the value of a bond fluctuates up and down during its lifetime,
depending on how many investors are willing to pay for it. The amount the investor actually pays for the bond
is called the market.
A bond is sold at par when it is sold at a price equal to the face or par value, and is sold at premium when it is
sold at a price higher than its face or par value. The bond is bought at a discount if it is bought for less than its
par value.

Dividends on Preferred and Common Stocks

Dividends are the distribution of a company’s profits to its shareholders. Shareholders are persons who own
shares of stocks in a corporation. There are two (2) types of stocks: preferred and common stocks. Preferred
stocks is a class of corporate stock in which the investor has preferential rights over the common shareholders
to dividends and a company’s assets.

Common stocks is a class of corporate stock in which the investor has voting rights and shares directly in the
success or failure of the business.

A par value is an arbitrary monetary figure specified in the corporate charter for each share of stock and printed
on each stock certificate. The dividend for par value preferred stock is quoted as a percent of the par value.
Alternatively, a no-par value stock is a stock that does not have a par value and the dividend is quoted as a
peso amount per share.

Cumulative preferred stock is a type of preferred stock that receives a dividend each year. The dividend in
arrears is the amount of dividends that accumulate and are owned to cumulative preferred shareholders before
for past years in which no dividends are paid.

Preferred stocks are categorized as nonparticipating and participating. Nonparticipating stock means that
shareholders receive only fixed dividend, while participating stock means that the shareholders may receive
additional dividends if the company perform well. Convertible preferred means the stock may be exchanged
for a specified number of common shares in the future.

The following are the formulas used in stocks:

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛)
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑇𝑜𝑡𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 – 𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = 𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 × 𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑟𝑎𝑡𝑒

Example 1: The AUS Enterprises has 1,500,000 shares of common stock outstanding. If a dividend of
₱30,000,000 was declared by the company directors last year, what are the dividends per share of common
stock?
Solution:
Because the company has no preferred stock, the common shareholders will receive the entire dividends.
Given: 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱30,000,000
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛) = 1,500,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛)
30,000,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) =
1,500,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) = ₱20 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
The dividend per share of stock is ₱20

Example 2: The board of directors of SSS, Inc. has declared a dividend of ₱18,000,000. The company has
40,000 shares preferred stock that pay ₱60 per share and 80,000 shares of common stock. Calculate the
amount of dividends due the preferred shareholders and the dividend per share of common stock.
Solution:
𝐺𝑆𝑆𝑣𝑒𝑛: 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = 40,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = ₱60
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛) = 80,000
The total amount of dividends of a preferred stock is
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 40,000(60)
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱2,400,000

Total amount of common dividend is

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑇𝑜𝑡𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 − 𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 18,000,000 − 2,400,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱15,600,000

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑

𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛)
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) = ₱195 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
The dividend per share of common stock is ₱195.

Example 3: Neri Corporation has 70,000 shares of ₱2,000 per value, 5% cumulative preferred stock and
250,000 shares of common stock. Although no dividend was declared last year, a ₱25,000,000 dividend was
declared this year. Determine the amount of dividends due the preferred shareholders and the dividend per
share of common stock.
Solution: Take note that preferred stock is cumulative and the company did not pay a dividend in the previous
year, the preferred shareholders are entitled to the dividends in arrears and the dividend for the current period.
Given: 𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 = ₱2,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑟𝑎𝑡𝑒 = 5% = 0.05
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = 70,000
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛) = 250,000
𝑇ℎ𝑒 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑛 𝑎 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘 𝑆𝑆𝑠
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = 𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 × 𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑟𝑎𝑡𝑒
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = 2,000(.05)
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑) = ₱100 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

The total dividend on a preferred stock in arrears is

𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 70,000(100)
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱7,000,000

𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 7,000,000 (𝑎𝑟𝑟𝑒𝑎𝑟𝑠) + 7,000,000 (𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟)

𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱14,000,000
The amount of dividends due for preferred stock is ₱14,000,000

The amount of dividends due for common stock is

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 𝑇𝑜𝑡𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 − 𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑒𝑜𝑜𝑒𝑟𝑟𝑒𝑑 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = 25,000,000 – 14,000,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 = ₱11,000,000

Computing for the dividend per share

𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 (𝑐𝑜𝑚𝑚𝑜𝑛)
11,000,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) =
250,000
𝐷𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑐𝑜𝑚𝑚𝑜𝑛) = ₱44 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
The dividend per share of common stock is ₱44.
Stock Valuation
Stock Valuation is the process of calculating the values of goods or materials owned by a company or available
for sale in a store at a particular time.

A. Current Yield for a Stock

To measure how much you have earned on a stock as compared with other investments, compute for the current
yield. The current yield is a way of determining the current value of a stock. The current yield shows how much
dividend you can get as a percentage of the current price of the stock per share. If a stock pays no dividend,
there is no current yield. The current yield is computed using the formula:

𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑖𝑣𝑖𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
𝐶𝑢𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Example 4: If MMDN Corporation paid a dividend of ₱142.60 per share last year. If yesterday’s last price was
₱2,300, what is the current yield on the stock?
Solution:
Given: 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱142.60
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱2,300
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
142.60
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
2,300
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 = 0.062 𝑜𝑟 6.2%

Example 5: Calculate the current yield for MMDN Corporation stock, which pays a dividend of ₱70 per year and
is currently selling at ₱1,400 per share.
Solution:
Given: 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱70
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱1,400
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑆𝑆𝑣𝑆𝑆𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
70
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
1,400
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 = 0.05 𝑜𝑟 5%
The current yield rate per share is 5%.

B. Price-Earnings Ratio of Stock

Another thing that some people use to help them decide which stock to buy is the price-earnings ratio. This ratio
is found using the formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 =
𝐸𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Example 6: WSS Inc. is currently selling for ₱2,685 per share. If the company had earnings per share of ₱89.50
in the past year, what is the price-earnings ratio for WSS?
Solution:
Given: 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱2,685
𝐸𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱89.50
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 =
𝐸𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
2,685
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 =
89.50
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 = 30 𝑜𝑟 30: 1

This means investors are currently willing to pay 30 times the earnings for one share of WSS stock.
Example 7: Sofia would like to own stocks in SSS and GSIS, but she does not know if either stock is a good
buy. One thing she can do is to look at the price-earnings ratio for each.
a. SSS, price share ₱2,464, annual net income per share ₱88, and
b. GSIS, price share ₱1,900, annual net income per share ₱76.
Solution:
Use the formula for price-earnings ratio to get
a. Price-earnings ratio for SSS
Given: 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱2,464
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 2,464
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 = = = 28
𝐸𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 88
The price-earnings ratio of SSS stock is 28 times per share.
b. Price-earnings ratio for GSIS
Given: 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₱1,900
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 1,900
𝑃𝑟𝑆𝑆𝑐𝑒 − 𝑒𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑅𝑎𝑡𝑆𝑆𝑜 = = = 25
𝐸𝑎𝑟𝑛𝑆𝑆𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 76
The price-earnings ratio of GSIS stock is 25 times per share.

The price-earnings ratio is not a perfect guide to future market behavior of a stock. Occasionally a low price-
earnings ratio implies that the stock is undervalued in the market-in order words a good buy. At times a low
price-earnings ratio denotes that investors see a poor future for the company.

C. Cost, Proceeds, and Gain (or loss) of a Stock

Proceeds are the amount of money that an investor receives after selling a stock. It is computed as the value
of shares less the broker’s commission. The stockbroker’s commission is the fee charges for assisting in the
purchase or sale of shares of stocks; percent of the cost of the stock transaction. A stockbroker is a professional
in stock market trading and investment who acts as an agent in the selling and buying of stocks or other
securities. The gain (or loss) is the difference between the cost of purchasing the stock and the proceeds and
received when selling the stock.

One more factor affecting the commission is whether the amount of shares purchased is a round lot (multiple
of 100 shares), or an odd lot (less than 100 shares). The commission rate on a round lot is generally a bit lower
than an odd lot.

The following formula will be used:

𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑆ℎ𝑎𝑟𝑒𝑠 = 𝑃𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠
𝐵𝑟𝑜𝑘𝑒𝑟 ′ 𝑠𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑆𝑆𝑜𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐶𝑜𝑚𝑚𝑆𝑆𝑠𝑆𝑆𝑜𝑛 𝑟𝑎𝑡𝑒
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 + 𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟 ′ 𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑆𝑆𝑜𝑛
𝑉𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑃𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑉𝑎𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛
𝐺𝑎𝑆𝑆𝑛 (𝑜𝑟 𝑙𝑜𝑠𝑠) 𝑜𝑛 𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑆𝑆𝑜𝑛 = 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

Example 8: Shiela purchased 250 shares of AUS Inc. common stock at ₱3,500 per share. A few months later,
you sell the shares at ₱4,000. Her stockbroker charges 3% commission on round lots and 4% on odd lots.
Calculate the (a) total cost, (b) the proceeds, and (c) the gain or loss on the transaction.

Solution:
Given: Price per share = ₱3,500 Commission rate (round lots) =3%=0.03
Number of shares = 250 Commission rate (odd lots) =4%=0.04
a. Cost of purchasing stock
𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑃𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 = 3,500(250) = ₱875,000
𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝐶𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐶𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 𝑟𝑎𝑡𝑒
𝑅𝑜𝑢𝑛𝑑 𝑙𝑜𝑡 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 200 𝑠ℎ𝑎𝑟𝑒𝑠 × 3,500 × 0.03 = ₱21,000
 𝑂𝑑𝑑 𝑙𝑜𝑡 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑆𝑆𝑜𝑛 = 50 𝑠ℎ𝑎𝑟𝑒𝑠 × 3,500 × 0.04 = ₱7,000
𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 21,000 + 7,000 = 28,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 + 𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 875,000 + 28,000 = 903,000
The total cost of 250 shares of common stock is ₱903,000.

b. Proceeds from selling stock

𝑉𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑃𝑟𝑆𝑆𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 = 4,000(250) = ₱1,000,000
𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐶𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 𝑟𝑎𝑡𝑒
𝑅𝑜𝑢𝑛𝑑 𝑙𝑜𝑡 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 200 𝑠ℎ𝑎𝑟𝑒𝑠 × 4,000 × 0.03 = ₱24,000
𝑂𝑑𝑑 𝑙𝑜𝑡 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 50 𝑠ℎ𝑎𝑟𝑒𝑠 × 4,000 × 0.04 = ₱8,000
𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 24,000 + 8,000 = ₱32,000
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑠ℎ𝑎𝑟𝑒𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐵𝑟𝑜𝑘𝑒𝑟′𝑠 𝑐𝑜𝑚𝑚𝑆𝑆𝑠𝑠𝑆𝑆𝑜𝑛 = 1,000,000 − 32,000 = ₱968,000
The proceeds on common stock are ₱968,000.

c. Gain (or loss) on the transaction

𝐺𝑎𝑆𝑆𝑛 (𝑜𝑟 𝑙𝑜𝑠𝑠)𝑜𝑛 𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑆𝑆𝑜𝑛 = 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 968,000 − 903,000 = ₱65,000
The transaction gain is ₱65,000.

Bond Valuation
Bond valuation is a technique for determining the fair value of a particular bond.

A. Current Yield of Bond

The current yield of a bond is computed by dividing the annual interest by the purchase price of a bond.
The current yield is obtained using the formula:
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 =
𝑃𝑟𝑆𝑆𝑐𝑒 𝑜𝑜𝑜 𝑎 𝐵𝑜𝑛𝑑

Example 9: What is the current yield of a bond whose face value is ₱14,500 and pays a yearly interest of 12%if
purchased at face value at ₱13,920?

Solution:
When the price of bond is ₱14,500
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑆𝑛𝑡𝑒𝑟𝑒𝑠𝑡 . 12(14,500)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 = = = 12%
𝑃𝑟𝑆𝑆𝑐𝑒 𝑜𝑜𝑜 𝐵𝑜𝑛𝑑 14,500

When the price of bond is ₱13,920

𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 . 12(14,500)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑆𝑆𝑒𝑙𝑑 = = = 12.5%
𝑃𝑟𝑆𝑆𝑐𝑒 𝑜𝑜𝑜 𝐵𝑜𝑛𝑑 13,920

B. Price of a Bond using General Method

The same with stocks, when bonds are sold or bought, charge is commonly added to the price of the
bond. The following variables will be in our mathematical treatment of bonds:
𝑉 = 𝑅𝑒𝑑𝑒𝑚𝑝𝑡𝑆𝑆𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑏𝑜𝑛𝑑
𝐹 = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑜𝑜 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑
𝑃 = 𝑃𝑟𝑆𝑆𝑐𝑒 𝑜𝑜𝑜 𝑎 𝑏𝑜𝑛𝑑
𝑟 = 𝐵𝑜𝑛𝑑 𝑟𝑎𝑡𝑒
𝑘 = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑗𝑗 = 𝑁𝑜𝑚𝑆𝑆𝑛𝑎𝑙 𝑆𝑆𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑜𝑜 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑆𝑆𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑡 = 𝑇𝑆𝑆𝑚𝑒 𝑝𝑒𝑟𝑆𝑆𝑜𝑑 (𝑡𝑒𝑟𝑚) 𝑜𝑜𝑜 𝑡ℎ𝑒 𝑙𝑜𝑎𝑛 𝑜𝑟 𝑆𝑆𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑏 = 𝑃𝑒𝑟𝑆𝑆𝑜𝑑𝑆𝑆𝑐 𝑏𝑜𝑛𝑑 𝑆𝑆𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑆𝑆 = 𝑃𝑒𝑟𝑆𝑆𝑜𝑑𝑆𝑆𝑐 𝑆𝑆𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

The regular (periodic) interest payment from the bond will be:
𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 × 𝑃𝑒𝑟𝑆𝑆𝑜𝑑𝑆𝑆𝑐 𝑏𝑜𝑛𝑑 𝑆𝑆𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
 𝑘 = 𝐹𝑏
The price of a bond is computed using the formula below:
1 − (1 + 𝑆𝑆)−𝑛
𝑃 = 𝑉(1 + 𝑆𝑆)−𝑛 + 𝑘 � �
𝑆𝑆

Example 10: A ₱3,200, at 9% bond pays coupons quarterly and will be redeemed on July 7, 2016. Find the
price if the bond is bought on July 7, 2012 to yield 8% compounded quarterly if the bond is redeemed at
par, (b) if the bond if redeemable at 110%.

Given:
𝑉 = ₱3,200 𝑗𝑗 = 8% 𝑜𝑟 .08 𝑡 = 4 𝑦𝑒𝑎𝑟𝑠
𝑚=4 𝑟 = 9% 𝑜𝑟 .09 𝑛 = 𝑡𝑚 = 4(4 = 16)
𝑟 0.09 𝑗𝑗 . 08
𝑏= = = .0225 𝑆𝑆 = = = .02
𝑚 4 𝑚 4

The redemption value is

𝑘 = 𝐹𝑏 = 3,200(. 0225) = ₱72
The coupon payments are ₱72.

1 − (1 + 𝑆)−
𝑃 = 𝑉(1 + 𝑆𝑆)−𝑛 + 𝑘 � �
𝑆𝑆
1 − (1 + .02)−16
𝑃 = 3,200(1 + .02)−16 + 72 � �
. 02
1 − (1.02)−16
𝑃 = 3,200(1.02)−16 + 72 � �
. 02
𝑃 = 3,200(0.7284458137) + 72(13.57770931)
𝑃 = 2,331.026604 + 977.5950706
𝑃 = ₱3,308.62
The price of the bond to yield 8% is ₱3,308.62.

At 110% redemption means

𝑉 = 3,200(1.10) = ₱3,520
1 − (1 + 𝑆𝑆)−𝑛
𝑃 = 𝑉(1 + 𝑆𝑆)−𝑛 + 𝑘 � �
𝑆𝑆
1 − (1 + 0.02)−16
𝑃 = 3,520(1 + 0.02)−16 + 72 � �
0.02
𝑃 = 3,520(0.7284458137) + 72(13.57770931)
𝑃 = 2,564.129264 + 977.5950706
𝑃 = ₱3,541.72
The price of the bond is ₱3,541.72.