Your Questions About Stocks And Bonds Game

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Ken asks…

Re: 401k, are ‘bond funds’ or ‘cash reserves’ a safer choice right now until the market stabilizes?

I still have a long ways until retirement (approx 30 years), but if the market crashes completely is it possible for my 401k (which is very heavy in stocks right now) to be wiped out completely? I don’t want to play the guessing game and try to short anything, I’m just wondering if the ‘cash reserves’ are safe (or safer) from a market crash? Also, would bond funds lose money if the market surged unexpectedly, or would they simply not gain as much as stocks? I was just looking for a stable place for my 401k savings to rest until the market sorts itself out. I have some IRAs with money in Fidelity Cash Reserves, but my main 401k is locked into Fidelity with these options for bond funds: Fidelity Managed Income Portfolio II Class 2, PIMCO Total Return Inst CL, Vanguard Total Bond Mrkt Index Inv CL. What is the ‘safest’ choice right now???

financi4 answers:

Absolutely Fidelity Cash Reserve. Bond funds are a very bad investment options because the Fed has lowered interest rates to save their buddies on Wall Street. When those interest rates are raised back up to normal levels existing bonds will drop like rocks. But one of the best bond funds on the market today is the PIMCO Total Return.

James asks…

Financial Accounting help!!!?

I am in beginning Accounting in college and I am stuck on this stupid problem.. Please help me!!

Exercise 9-1 Compare financing alternatives (LO1)

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $24.7 million gaming center:

a. Issue $24.7 million of 6% bonds at face amount.

b.Issue 1 million shares of common stock for $24.7 per share.

Requirement 1:

Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Round your “Earnings per Share” to 2 decimal places. Omit the “$” sign in your response.)

I need to find each of these:

ISSUE BONDS:

Interest Expense:____
Income Before Tax:_____
Income Tax expense (35%):_____
Number of shares: 3,010,000
Earnings per share (Net income / # of shares):_____

ISSUE SHARES:
Everything is the same except it does not ask for Interest expense and the Number of Shares is 4,010,000..

For both the bonds and shares the operating income is 11,600,000

I am not sure if yall can help me with this but if you can please do so..

financi4 answers:

Alternative 1 ( if finance raised by bond issue)
$m (calculation)
Operating Income 11.6
intrest expense: 1.48 (24.7 * 6%)
profit before tax 10.12 (11.6-1.48)
Tax 3.54 (10.12*35)
Profit after Tax 6.58 (10.12-6.58)

earnings per share 2.19 (6.58/3.01)

——————————————————————————
Alternative 2 ( if finance raised by share issue)
$m (calculation)
Operating Income 11.6 (as given in question)
intrest expense: – – (as no bond issue so no interest payment)
profit before tax 11.6
Tax 4.06 (11.6 * 35)
Profit after Tax 7.54 (11.6 – 4.06)
(or net profit)
earnings per share 1.88 (7.54/4.01) as new shares will be issued and will thus increase
numbe of shares and lower earnings per share

Best of luck

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