In Chapter 7, we saw stockbroker Don Kraska, CFA, preparing to answer a list of questions concerning stock valuation. These questions and answers served as the outline for a presentation he then made before a committee of officials from the Town of Webley. The committee needed advice on how best to follow the instructions in the will of James Lawrence, who had left the town 2,000 shares of Google stock, currently valued at approximately $1,250,000. Lawrences will instructed the town to sell the Google shares and set up a diversified stock portfolio that would fund annual grants for youth groups in the town.

During the course of Kraskas first presentation, Webley officials expressed a great deal of concern about the risks of the stock market, yet Lawrences instructions were quite clear. The town was to invest the money in stocks, not bonds or certificates of deposit, and it could retain only limited amounts of cash for grant-making purposes.

Kraska has set up a second meeting to discuss risk. He really wants this account, so he will try to strike the right tone and behave reassuringly, but still be realistic. He has been in the business since 1985, so he knows very well that the market has its ups and downs.

Assume once again that you are Kraska preparing to answer a set of return- and risk-oriented questions that have surfaced as a result of the first presentation.

Please explain how to solve the following questions and show steps to solutions

(a) First, what was the EAR on Lawrences original investment in Google stock?

(b) Second, explain to the committee the possible returns on a $1,000,000 stock portfolio if it gains $30,000 in dividends and +/ $100,000 in market value.

(c) Third, if the gain is $100,000, what is the value of the grants and the balance of the fund?

(d) Fourth, if the loss is $100,000, what is value of the grants and the balance of the fund?