Jay is reviewing his portfolio of investments, which include certain stocks and bonds. He has a large amount tied up in U.S. Treasury bills paying 3%. He is considering moving some of his funds from the T-bills into a stock. The stock has a beta of 1.25. If Jay expects a return of 14% from the stock (a little better than the current market return of 13%), should he buy the stock or leave his funds in the T-bill?
> This year, Shoreline Light and Gas (SL&G) paid its stockholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G predicting that the company’s annual dividends would grow at the rate of 10% per year for each of t
> The price of Myrtle’s Plumbing Supply Co. is now $80. The company pays no dividends. Ms. Bossard expects the price three years from now to be $110 per share. Should she buy Myrtle’s Plumbing stock if she desires a 10% rate of return? Explain.
> Let’s assume that you’re thinking about buying stock in West Coast Electronics. So far in your analysis, you’ve uncovered the following information: The stock pays annual dividends of $5.00 a share indefinitely. It trades at a P/E of 10 times earnings an
> Assume you’ve generated the following information about the stock of Bufford’s Burger Barns: The company’s latest dividends of $4 a share are expected to grow to $4.32 next year, to $4.67 the year after that, and to $5.04 in three years. After that, you
> An investor estimates that next year’s sales for Dursley’s Hotels, Inc., should amount to about $100 million. The company has five million shares outstanding, generates a net profit margin of about 10%, and has a payout ratio of 50%. All figures are expe
> Financial Learning Systems has 2.5 million shares of common stock outstanding and 100,000 shares of preferred stock. (The preferred pays annual cash dividends of $5 a share, and the common pays annual cash dividends of 25 cents a share.) Last year, the c
> Highgate Computer Company produces $1.8 million in profits from $27 million in sales. It has total assets of $15 million. a. Calculate Highgate’s total asset turnover and its net profit margin. b. Find the company’s ROA, ROE, and book value per share, gi
> What role could an asset allocation fund play? What makes an asset allocation scheme effective?
> Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack
> PEGCOR has a P/E ratio of 15. Earnings per share are $2.00, and the expected EPS five years from today is $3.22. Calculate the PEG ratio.
> The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 million shares of common stock outstanding. The company has total assets of $75 million and total stockholders’ equity of $45 million. It pays $1 per share in common divid
> The following summary financial statistics were obtained from the 2015 Otago Bay Marine Motors (OBMM) annual report. 2015 ($ in millions) Sales revenue ………………………………………………………………………………… $179.3 Total assets …………………………………………………………………………………… $136.3 Net earni
> Describe the types of services offered by brokerage firms, and discuss the criteria for selecting a suitable stockbroker.
> The following table lists the 2015 and 2016 financial statements for Otago Bay Marine Motors, a major manufacturer of top-of-the-line outboard motors. a. On the basis of the information provided, calculate the following financial ratios for 2015 and
> Listed below are six pairs of stocks. Pick one of these pairs and then, using the resources available at your campus or public library (or on the Internet), comparatively analyze the two stocks. Which is fundamentally stronger and holds more promise for
> Using the resources available at your campus or public library (or on the Internet), select any common stock you like and determine as many of the profitability, activity, liquidity, leverage, and market ratios covered in this and the preceding chapter a
> Stroud Sporting Gear Inc. has a net profit margin of 9%, a total asset turnover of 2.4, total assets of $225 million, and total equity of $120 million. What is the company’s return on equity?
> Find the EPS, P/E ratio, and dividend yield of a company that has five million shares of common stock outstanding (the shares trade in the market at $25), earns 10% after taxes on annual sales of $150 million, and has a dividend payout ratio of 35%. At w
> Briefly describe the basic approaches to asset allocation: (a) fixed weightings, (b) flexible weightings, and (c) tactical asset allocation.
> The Buffalo Manufacturing Company has total assets of $12 million, an asset turnover of 2.2 times, and a net profit margin of 14%. a. What is Buffalo’s return on assets? b. Find Buffalo’s ROE, given that 40% of the assets are financed with stockholders’
> What is the difference between the variable-growth dividend valuation model and the free cash flow to equity approach to stock valuation? Which procedure would work better if you were trying to value a growth stock that pays little or no dividends? Expla
> Assume you are given the following abbreviated financial statement. ($ in millions) Current assets …………………………………………………………………………………. $150.0 Fixed and other assets ……………………………………….…………………………… $200.0 Total assets ……………………………………….……………………………………………. $350.0 C
> Consider the following information about Truly Good Coffee, Inc. Total assets …………………………………………………………………… $240 million Total debt ……………………………………………………………………….. $115 million Preferred stock ……………………………………………………………….. $ 25 million Common stockholders’ equi
> On January 1, 2013, an investor bought 200 shares of Gottahavit, Inc., for $50 per share. On January 3, 2014, the investor sold the stock for $55 per share. The stock paid a quarterly dividend of $0.25 per share. How much (in $) did the investor earn on
> George Robbins considers himself an aggressive investor. He’s thinking about investing in some foreign securities and is looking at stocks in (1) Bayer AG, the big German chemical and health-care firm, and (2) Swisscom AG, the Swiss telecommunications co
> Discuss each of the following as they are related to assessing bond market behavior. a. Bond yields b. Bond indexes
> Ravi Dumar is a stockbroker who lives with his wife, Sasha, and their five children in Milwaukee, Wisconsin. Ravi firmly believes that the only way to make money in the market is to follow an aggressive investment posture—for example, to use margin tradi
> In January 2012 an investor purchased 800 shares of Engulf & Devour, a rapidly growing high-tech conglomerate. From 2012 through 2016, the stock turned in the following dividend and share price performance. On the basis of this information, find th
> Using the resources at your campus or public library or on the Internet, select any three common stocks you like and determine the latest book value per share, earnings per share, dividend payout ratio, and dividend yield for each. (Show all your calcula
> What is asset allocation? How does it differ from diversification? What role does asset allocation play in constructing an investment portfolio?
> Southern Cities Trucking Company has the following five-year record of earnings per share. Year ……………………………………………………..………………………………… EPS 2012 ……………………………………………………………………………………… $1.40 2013 ……………………………………………………………………………………… $2.10 2014 …………………………………………………………
> Wilfred Nadeau owns 200 shares of Consolidated Glue. The company’s board of directors recently declared a cash dividend of 50 cents a share payable April 18 (a Wednesday) to shareholders of record on March 22 (a Thursday). a. How much in dividends, if an
> Briefly describe the dividend valuation model and the three versions of this model. Explain how CAPM fits into the DVM.
> An investor owns some stock in Harry’s Pottery Inc. The stock recently underwent a 5-for-3 stock split. If the stock was trading at $40 per share just before the split, how much is each share most likely selling for after the split? If the investor owned
> Assume you wish to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfect positive, uncorrelated, and perfect negative. The following average return and risk value
> You have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data. You have been told that you can create two portfolios—one consisting of assets A and B and the other consisting of
> You have been given the following return data on three assets—F, G, and H—over the period 2018–2021. Using these assets, you have isolated three investment alternatives: Alternative Investment
> Refer to Problem 5.3. Assume that asset L represents 60% of the portfolio and asset M is 40%. Calculate the average return and standard deviation of this portfolio’s returns over the six-year period. Compare your answers to the answers
> Referring to Problem 5.30, assume that you believe that each of the five assets will earn the return shown in the table below. Based on these figures and the weights in Problem 5.29, what returns do you believe that Portfolios A and B will earn. Which po
> Briefly describe the composition and general thrust of each of the following indexes. a. NYSE Composite Index b. NYSE MKT Composite Index c. Nasdaq Stock Market indexes d. Value Line Composite Index
> Describe the two items an investor should consider before reaching a decision to sell an investment.
> Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The projected returns over the next six years, 2018–2023
> Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the
> Stock A has a beta of 0.8, stock B has a beta of 1.4, and stock C has a beta of -0.3. a. Rank these stocks from the most risky to the least risky. b. If the return on the market portfolio increases by 12%, what change in the return for each of the stocks
> In the stock valuation framework, how can you tell whether a particular security is a worthwhile investment candidate? What roles does the required rate of return play in this process? Would you invest in a stock if all you could earn was a rate of retur
> If portfolio A has a beta of 1.5 and portfolio Z has a beta of -1.5, what do the two values indicate? If the return on the market rises by 20%, what impact, if any, would this have on the returns from portfolios A and Z? Explain.
> For his portfolio, Jack Cashman randomly selected securities from all those listed on the New York Stock Exchange. He began with one security and added securities one by one until a total of 20 securities were held in the portfolio. After each security w
> Portfolios A through J, which are listed in the following table along with their returns (rp) and risk (measured by the standard deviation, sp), represent all currently available portfolios in the feasible or attainable set. a. Plot the feasible, or at
> The risk-free rate is currently 3%, and the market return is 10%. Assume you are considering the following investments. Investment ……………………………………………………………………………. Beta A ………………………………………………………………………………………………. 1.5 B ………………………………………………………………………………………………. 1.
> Use the capital asset pricing model to find the required return for each of the following securities in light of the data given. Security Risk-Free Rate Market Return Beta A 5% 8% 1.3 В 8% 13% 0.9 9% 12% 0.2 10% 15% 1.0 6% 10% 0.6
> Identify and briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. Note especially how economic issues fit into industry analysis.
> Referring to Problem 5.20, using the portfolio beta, what would you expect the value of your portfolio to be if the market rallied 20%? Declined 20%? Problem 5.20: Referring to Problem 5.19, assume you have a portfolio with $20,000 invested in each of
> List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor’s Corporation. Indicate the number and source of the securities used in calculating each average or index.
> Using your data from Problem 5.1, calculate the portfolio standard deviation. Problem 5.1: Your portfolio had the values in the following table for the four years listed. There were no withdrawals or contributions of new funds to the portfolio. Calcula
> Assume the betas for securities A, B, and C are as shown here. Security ……………………………………………………………………………………. Beta A ……………………………………………………………………………………………….. 1.4 B ……………………………………………………………………………………………….. 0.8 C ……………………………………………………………………………………………….. -0.9 a. Ca
> What is the market multiple and how can it help in evaluating a stock’s P/E ratio? Is a stock’s relative P/E the same thing as the market multiple? Explain.
> A security has a beta of 1.2. Is this security more or less risky than the market? Explain. Assess the impact on the required return of this security in each of the following cases. a. The market return increases by 15%. b. The market return decreases by
> Imagine you wish to estimate the betas for two investments, A and B. You have gathered the following return data for the market and for each of the investments over the past 10 years, 2008–2017. a. On a set of market return (x-axis)&a
> Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Lowe’s (LOW) to create an Excel spreadsheet that calculates the correlation coefficient for HD and LOW annual returns. Problem 5.9: The following table contains an
> Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Lowe’s (LOW) to create an Excel spreadsheet that calculates the standard deviation of annual returns for HD, LOW, and the equally weighted portfolio of HD and LOW.
> The following table lists the lump sum payout, the timing of that payout, and the discount rate associated with five different investments. Calculate the present value of each investment. Investment Future Sum Discount Rate Payout at End of Year $ 7
> Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.
> Assume you can earn 9% on the investments described below. How much money would each investment provide for you after six years? a. Invest $5,000 as a lump sum today. b. Invest $2,000 at the end of each of the next six years. c. Invest a lump sum of $3,0
> If you deposit $1,000 into an account at the end of each of the next 10 years and the account pays an annual interest rate of 2%, how much will be in the account after 10 years?
> The following table describes the characteristics of five annuities. Calculate the future value of each annuity given its characteristics. Annual Annuity Payment Annuity Length (yr) Interest Deposit Rate $ 2,500 $ 500 $ 1,000 A 8% 10 B 12% 6 20% D $
> The chart shows the number of global corporate bond issues for which Standard & Poor’s issued ratings upgrades or downgrades every year from 1981 to 2014. a. What is the trend in the number of ratings changes (both upgrades and down
> For each of the following initial investment amounts, calculate the future value at the end of the investment period if interest compounds annually. Investment Investment Amount Rate of Return Investment Period (yr) $ 200 $ 4,500 A 5% 20 8% 7 $10,00
> Can the growth prospects of a company affect its price-to-earnings multiple? Explain. How about the amount of debt a firm uses? Are there any other variables that affect the level of a firm’s P/E ratio?
> Which investment approach (or approaches) do you feel would be most appropriate for a quality-conscious investor? What kind of investment approach do you think you’d be most comfortable with? Explain.
> Using a financial calculator or spreadsheet, calculate the following. a. The future value of a $350 deposit left in an account paying 6% annual interest for 10 years. b. The future value at the end of five years of a $700 annual end-of-year deposit into
> Kent Weitz wishes to assess whether the following investments are satisfactory. Use his required return (discount rate) of 17% to evaluate each investment. Make an investment recommendation to Kent. Investment ($) A B Purchase Price $13,000 $8,500 E
> Terri Allessandro has an opportunity to make any of the following investments. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can earn a 10% rate of return on investments similar to those
> Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?
> Using a financial calculator or an Excel spreadsheet, calculate the following. a. The present value of $500 to be received four years from now, using an 11% discount rate. b. The present value of the following end-of-year income streams, using a 9% disco
> For each of the investments below, calculate the present value of the annual end-of-year payments at the specified discount rate over the given period. Investment Annual Payments Discount Rate Period (yr) $ 1,200 $ 5,500 A 7% 3 B 12% 15 $ 700 20% 9
> Consider the streams of income given in the following table. a. Find the present value of each income stream, using a 1% discount rate, then repeat those calculations using an 8% discount rate. b. Compare the present values and discuss them in light of t
> Find the present value of each of the following streams of income, assuming a 12% discount rate. A End of Year Income End of Year Income End of Year Income 1 $2,200 1 $10,000 1-5 $10,000/yr $3,000 $5,000/yr $ 8,000/yr 2 2-5 6-10 $4,000 6 $7,000 4 $6
> The accompanying table shows a series of transactions in a savings account. The account pays 6% simple interest, and the account owner withdraws interest as soon as it is paid. Create a new table that shows (a) the account balance at the end of each year
> Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. a. The risk-free rate of return, rf b. The required returns for investments A and B
> At the beginning of this chapter you read about a 2015 earnings announcement from HP in which earnings per share were reported as $1.85 for the quarter. Let’s make a simple assumption and say that earnings for the year were four times as much, or $7.40 p
> Are the expected future earnings of the firm important in determining a stock’s investment suitability? Discuss how these and other future estimates fit into the stock valuation framework.
> Refer to the table in Problem 4.5. What is the total return in dollars and as a percentage of your original investment if you purchased 100 shares of the investment at the beginning of 2013 and sold it at the end of 2015? Problem 4.5: Consider the hist
> Consider the historical data for an investment given in the accompanying table. a. Calculate the total return (in dollars) for each year. b. Indicate the level of return you would expect in 2018 and in 2019. c. Comment on your forecast. Market Value
> Briefly describe each of the following plans and differentiate among them. a. Dollar-cost averaging b. Constant-dollar plan c. Constant-ratio plan d. Variable-ratio plan
> The historical returns for two investments—A and B—are summarized in the following table for the period 2013 to 2017. Use the data to answer the questions that follow. a. On the basis of a review of the return data,
> For each of the following streams of dividends, estimate the compound annual rate of growth between the earliest year for which a value is given and 2017. Dividend Stream Year A B 2008 $1.50 2009 $1.55 2010 $1.61 2011 $1.68 $2.50 2012 $1.76 $2.60 20
> Assume that an investment generates the following income stream and can be purchased at the beginning of 2017 for $1,000 and sold at the end of 2020 for $1,200. Estimate the IRR for this investment. If a minimum return of 9% is required, would you recomm
> Elliott Dumack must earn a minimum rate of return of 11% to be adequately compensated for the risk of the following investment. Initial Investment …………………………………………………….. $14,000 End of Year Income 1 ………………………………………………………………………………… $6,000 2 …………………………………
> Use a financial calculator or an Excel spreadsheet to estimate the IRR for each of the following investments. Investment A B Initial Investment $8,500 $9,500 End of Year Income 1 $2,500 $2,000 2 $2,500 $2,500 $2,500 $3,000 4 $2,500 $3,500 5 $2,500 $
> Your friend asks you to invest $10,000 in a business venture. Based on your estimates, you would receive nothing for three years, at the end of year four you would receive $4,900, and at the end of year five you would receive $14,500. If your estimates a
> You invest $7,000 in stock and receive dividends of $65, $70, $70, and $65 over the following four years. At the end of the four years, you sell the stock for $7,900. What was the IRR on this investment?
> Assume you invest $4,000 today in an investment that promises to return $9,000 in exactly 10 years. a. Use the present value technique to estimate the IRR on this investment. b. If a minimum annual return of 9% is required, would you recommend this inves
> Briefly describe the price-to-sales ratio and explain how it is used to value stocks. Why not just use the P/E multiple? How does the P/S ratio differ from the P/BV measure?
> In this problem we will visit United Rentals Inc. (URI), which was introduced at the beginning of the chapter. The following table shows the monthly return on URI stock and on the S&P 500 stock index from January 2009 to December 2014. a. Using an
> Explain the role that formula plans can play in the timing of security transactions. Describe the logic underlying the use of these plans.
> Define and differentiate between the following pairs of terms. a. Treasury stock versus classified stock b. Round lot versus odd lot c. Par value versus market value d. Book value versus investment value
> You are considering two investment alternatives. The first is a stock that pays quarterly dividends of $0.25 per share and is trading at $20 per share; you expect to sell the stock in six months for $24. The second is a stock that pays quarterly dividend
> If you place a stop-loss order to sell at $23 on a stock currently selling for $26.50 per share, what is likely to be the minimum loss you will experience on 50 shares if the stock price rapidly declines to $20.50 per share? Explain. What if you had plac
> Imagine that you have placed a limit order to buy 100 shares of Sallisaw Tool at a price of $38, although the stock is currently selling for $41. Discuss the consequences, if any, of each of the following situations. a. The stock price drops to $39 per s
> Al Cromwell places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $50 per share. Ignoring brokerage commissions, determine how much money Cromwell will probably have to pay. If he h
