Newsletter: March, 2009

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Money MathWhere does math come in handy just about every day? In matters of money, of course! Every time you make change, calculate a tip, check out the interest you’ve earned on your savings account, or pay sales tax, there’s math at work. This is one place where your skill with numbers makes a big difference.

Fast Fact

When is 100 cents worth more than a dollar? Read down to find out.

What’s Your Percentage?

Percentages can be used to describe almost any fraction of something, but they’re super useful in money math. If a bank says, “This savings account pays 4% interest every year,” you’ll get 4 cents a year for every dollar you put in. Those pennies add up in a hurry!

So what does “percent” mean? It means “per hundred.” A percentage is just a way to express a fraction as an amount per hundred of a given thing. Percentages are all over the place:

The rate of interest you get from a savings account
The rate of interest you pay for credit card and loan balances
Passing scores on tests
Tips in restaurants (usually 15% to 20% of the bill)
Pay raises
Changes in the stock market

Handy How-To: Percentages

Want to know how much a percentage of something is? Just multiply the “something” by the percentage, then divide by 100.

Q. What is 25% of 20?

A. 25 x 20 = 500

500 / 100 = 5

25% of 20 is 5.

Q. You want to buy a magazine. The cover price is $3.95, but all magazines in this store are 10% off the cover price. What will the magazine cost (before sales tax)? Hint: start by figuring out 10% of $3.95, and then subtract it from the cover price. The answer is at the bottom of the newsletter–don’t peek!

Biz Kid of the Month: Laura Valiente, LaVa Bags

Laura makes custom handbags inspired by the latest fashions. She uses her money math skills to maximize profits and stay on top of taxes. You can get your own LaVa Bag at http://www.lavabags.weebly.com!

Tell me about your business.
I design sew and sell bags, all custom made–any color, any style. I cater to the needs of my customers.

And some of the materials you use are recycled, right?
Yes, I use jeans, tops, fabric samples from upholstery companies, handles from cool old leather bags.

That helps keep costs down.
I also keep track of how much fabric I use in each bag and how much it costs. I sell most of my bags for the same price, about $20, so I need to keep costs below that to make a profit.

How else do you use math in your business?
I charge sales tax. I carry a calculator for that, just to make sure I get it right.

How do you keep track of everything?
Every bag has a number and I keep copies of every check I receive.

Do you have goals for your business?
I want to make it big! I plan to study business administration in college. I also need to refine my techniques so I can put fancy stuff on the bags like cool hardware and zippers.

A Tip Tip

When you eat in a restaurant, you should usually leave at least a 15% tip. It’s easy to figure–just find 10% of the bill, then add half of that amount. To find 10% of any dollar amount, just move the decimal one place to the left.

Here’s an example:

Total bill: $14.00

10% of $14.00: $1.40

Half of $1.40: $0.70

Total tip: $1.40 + $0.70 = $2.10

Price to Earnings Ratio

The price to earnings ratio (P/E ratio) is one way of evaluating a stock’s price. If the price is high relative to the earnings, that can mean the stock is overpriced. How do they calculate P/E ratios? It’s just the stock price per share divided by the earnings per share (usually the earnings added over the most recent four quarters).

Check it out:

Igloo Ice Company stock sells for $1.00 per share. In the past four quarters, their earnings were $50,000.00. There are 100,000 shares of the company.

Earnings per share (EPS): $50,000.00/100,000 = $0.50 per share

P/E ratio: $1.00 / $0.50 = 2

Ask John Paul
Q: What does a P/E ratio tell me about a stock?
A: Usually, you want a stock with a low P/E ratio relative to what you think the company will be earning in the future. Let’s say that I buy a share of stock at $10, and the company makes $10,000,000. If, next year, the company makes $15,000,000, the share price is likely to go up. The thing to remember is that everyone else is thinking the same thing. Companies tend to be priced based on what the market thinks their earnings are going to be in the future. So, a low P/E ratio can also mean that the market thinks a stock is going to underperform. You should always look at the company as a whole.
John Paul Pigéon is a 12-year-old financial guru from Fort Worth, Texas who helps kids learn about money and business. Visit his Web site at http://www.johnpaulpigeon.com. Send your question to askjohnpaul@bizkids.com. It may be selected for our next newsletter!

Fast Fact Answer

Before 1982, pennies were minted from solid copper. When the price of copper reaches a certain level, 100 pennies can be worth significantly more by weight than $1.00. Some enterprising collectors even started hoarding copper pennies in hopes of making a fortune. Click here to get the full story.

Percentages Answer
A. 10 x $3.95 = $39.50
$39.50 / 100 = $0.395
$3.95 – $0.395 = $3.555
Round up to a whole penny: you’ll pay $3.56.

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