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fundamentals of investing
Questions and Answers of
Fundamentals Of Investing
Using the individual tax rate schedule shown in Table 1.2, perform the following:a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of partnership
P. Chater Enterprises Inc. has a total asset turnover ratio of 2.6 and a net profit margin of 7%. What is the company’s return on assets?
Find the EPS, P/E ratio, and dividend yield of a company that has six million shares of common stock outstanding (the shares trade in the market at $30), earns 12% after taxes on annual sales of $80
The Al Hammad Company has total assets of QR18 million (Qatari riyal), an asset turnover of 1.35 times, and a net profit of 16% on sales.a. What is Al Hammad’s return on assets?b. Find Al
Briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. How economic issues fit into industry analysis.
In 2018, Bayer AG generated net profits (after taxes) of €2,117 million, reported sales of €14,647 million, and had 933 million common shares outstanding. It pays €1.5 per share in common
The following data have been gathered from the financial statements of Atlantia SpA (in millions of euros):Calculate the times interest earned ratios for 2017 and 2018. Is the company more or less
For its fiscal year ending on December 31, 2018, BMW AG reported net income of €6,117 million from sales of €99,095 million. The company also reported total assets of €171,622 million.a.
In 2018, BMW AG had a P/E ratio of 6.53 and analysts were projecting a growth rate of 5.2% per year in 2019, 2020, and 2021. What was BMW’s PEG ratio?
Bayer AG had net profits of €2,117 million, sales of €14,647 million, and 933 million shares outstanding in 2018. The company had total assets of €83,502 million and total stockholders’
A firm has 1.5 million shares of common stock outstanding with a book value of $10 per share. The firm also has total assets with a book value of $12 million. There is no preferred stock. What are
Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, identify each of the following and note how each would probably behave in a
In January 2016 an investor purchased 800 shares of Engulf & Devour, a rapidly growing high-tech conglomerate. From 2016 through 2020, the stock turned in the following dividend and share price
Bjørn bought 300 shares of Danske Bank A/S for DKK170 (Danish krone) per share on October 1, 2018. Unfortunately, a major newspaper reveals the very next day that the bank is being investigated for
Wolfgang and Martha who live in Zurich, Switzerland, have been dating for years and are now thinking about getting married. As a financially sophisticated couple, theywant to think through the tax
From 1999 to 2017, the average IPO rose by 18.4% in its first day of trading. In 1999, 117 deals doubled in price on the first day. What factors might contribute to the huge first-day returns on
MuleSoft, Inc. conducted its IPO on March 17, 2017, for the principal purposes of increasing its capitalization and financial flexibility, creating a public market for its Class A common stock, and
Emma would like to purchase one hundred shares of Barclays PLC through her Hargreaves Lansdown brokerage account. Hargreaves Lansdown charges a £7 commission for online trades. Emma logs on into her
An investor in the U.S. owns some shares of a European company that was worth 10,000 euros, and wants to sell them. The euro/U.S. dollar exchange rate is currently 0.925884, meaning that 1 dollar
Banjo who lives in Sydney purchased 50 shares of Deutsche Bank, a German stock traded on the Frankfurt Exchange for €10 per share exactly one year ago when the exchange rate was 1.6 A$/€ (i.e.,
Manuel purchased 100 shares of GlaxoSmithKline, a UK pharmaceutical firm when they were trading for £1,400 (pounds sterling) and the exchange rate between British pounds and euros was €1.3 per
Francesco buys 1,000 shares of Italgas at €3.5 per share, putting up a 75% margin.a. What is the debit balance in this transaction?b. How much equity funds must Francesco provide to make this
Barbara Simmons purchased 100 shares of Home Depot stock for $187 per share, using as little of her own money as she could. Her broker has a 55% initial margin requirement and a 45% maintenance
An investor short sells 75 shares of a stock for $69 per share. The initial margin is 60%, and the maintenance margin is 40%. The price of the stock falls to $57 per share. What is the margin, and
An investor short sells 75 shares of a stock for $69 per share. The initial margin is 60%, and the maintenance margin is 40%. The price of the stock rises to $82 per share. What is the margin, and
You are an investor and expect the price of a start-up’s shares to drop in the near future in response to an expected failure in technology. As a result, you sell 200 shares of this company at
Over the past 10 years, Molly O’Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a totalmarket value of
Ashley Morgan estimates that if he does 15 hours of research using data that will cost $90, there is a good chance that he can improve his expected return on a $20,000, one year investment from 7% to
An investor buys a bond for $1,000. The bond pays $40 in interest every six months. After two years, the investor sells the bond for $980. Describe the types of income or loss the investor had.
Assume you purchased a share of stock in Volkswagen AG at the beginning of 2019 for €136.26. A year later the stock was worth €156.62 and paid a dividend of €12.5 in 2019. Calculate the
Assume you purchase a bond for $870. The bond pays $25 interest every six months. You sell the bond after 18 months for $950. Calculate the following:a. Incomeb. Capital gain or lossc. Total return
Below are the prices on the first and last day of the year for Netflix common stock for several recent years.Netflix paid no dividends over this period. Calculate the return that an investor would
Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?
Given a real rate of interest of 3%, an expected inflation premium of 1.5%, and risk premiums for investments A and B of 5% and 6.5%, respectively, find the following:a. The risk-free rate of return,
Calculate a one-year holding period return for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain. Cash received 1st quarter 2nd
The risk-free rate is 4.8%, and expected inflation is 3.2%. If inflation expectations change such that future expected inflation rises to 4.5%, what will the new risk-free rate be?
Assume that an investment generates the following income stream and can be purchased at the beginning of 2020 for $2,000 and sold at the end of 2026 for $2,200. Estimate the IRR for this investment.
Rudolf is considering purchasing a German government bond that pays annual interest of €50 per €1,000 of par value. The bond matures in one year, and at that time he will collect the par value
Lachlan is going to invest NZ$4,000 today in an investment that promises to return NZ$9,000 in exactly 10 years.a. Use the present value technique to estimate the IRR of his investment.b. If Lachlan
Yasser Ben Rashid must earn a minimum rate of return of 12% to be adequately compensated for the risk of the following investment:a. Estimate the IRR on this investment.b. On the basis of your
Josef Samir is an investor in the Egyptian Exchange (EGX). He invests E£5,000 (Egyptian pound) in a cement company and receives dividends of E£65, 75, 76, and 76 over the next four years. At the
Rania Farouk must earn a return of 12% on an investment that requires an initial outlay of $2,000 and promises to return $6,000 in eight years.a. Estimate the IRR on this investment.b. On the basis
The table below shows the dividends per share paid in 2008 and 2018 for three companies. For each company, estimate the compound annual dividend growth rate over this decade.
A company paid a dividend of $1.50 per share in 2009 and announced that it will pay a dividend of $2.75 in 2016. Estimate the compound annual growth rate of the dividends.
In 2008, Volkswagen AG reported total revenue of €113.81 billion. Ten years later, it generated €236 billion in revenue. What was the compound annual growth rate in revenue from 2008 to 2018?
Refer to Problem 5.3. Assume that asset 1 represents 40% of the portfolio and asset 2 is 60%. Calculate the average return and standard deviation of this portfolio’s returns over the six-year
You have three portfolios containing four assets each. The following table specifies the weights assigned to each asset in each of the three portfolios, along with each asset’s beta:a. Calculate
Referring to Problem 5.20, assume you have a portfolio with $20,000 invested in each of investments A, B, and C. What is your portfolio beta?Data From Problem 5.20Assume the betas for securities A,
A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10
Jane is considering investing in three different stocks or creating three distinct twostock portfolios. Jane views herself as a rather conservative investor. She is able to obtain historical returns
Tsuyoshi owns 200 shares of Takeda Pharmaceutical Co. Ltd. The stock recently underwent a five-for-one stock split. If the stock was trading at ¥4,000 per share just before the split, how much is
How would you characterize the historical performance of stocks?
Coin Flip Co. has total assets of $8 million, total short- and long-term debt of $4.8 million, and $650,000 worth of 9% preferred stock outstanding. What is the firm’s total book value? What would
Build a spreadsheet containing the following quoted information. Based on the information given, what is the firm’s current market cap? What was the firm’s net income? Apple Inc. (AAPL) Hasdaq
Ben’s Burgers is trading at $23 per share. There are 390 million shares outstanding. What is the market capitalization of this company?
The Longmire Company recently reported net profits after taxes of $35.8 million. It has 3.5 million shares of common stock outstanding and pays preferred dividends of $2 million per year.a. Compute
On January 1, 2015, an investor bought 200 shares of Al-Masry Steel at E£25 per share. On January 3, 2016, the investor sold the stock for E£30 per share. The stock paid a quarterly dividend of
Mountain Rail has a net profit of $750 million. It has 600 million shares outstanding and pays annual dividends of $1.1 per share. What is the dividend payout ratio?
Eric Nadal owns 200 shares of Ranger Inc. The company’s board of directors recently declared a cash dividend of $1.90 a share payable April 18 (a Wednesday) to shareholders of record on March 22 (a
Greg and Natalie Wang, both in their 50s, have $100,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per
Using the resources at your campus or public library or on the Internet, select any three stocks listed on the Saudi Stock Exchange and determine the latest book value per share, earnings per share,
Southern Cities Trucking Company has the following five-year record of earnings per share.Which of the following procedures would produce higher dividends to stockholders over this five-year
On March 15, 2018, Bandhan Bank Ltd., a commercial bank focused on micro banking and general banking services in West Bengal, India, conducted its initial public offering (IPO) of common stock. In
Ravi Dumar is a stockbroker who firmly believes that the only way to make money in the market is to follow an aggressive investment posture—for example, to use margin trading. In fact, Ravi has
Darren Simmons, a financial analyst, considers himself a savvy investor. He has increased his investment portfolio considerably over the past five years. Although he has been fairly conservative with
Last year, Rocket Inc. earned a 20% return. Farmer’s Corp. earned 10%. The overall market return last year was 16%, and the risk-free rate was 2%. If Rocket stock has a beta of 2.0 and Farmer’s
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
Joseph is reviewing his portfolio, which includes certain stocks and bonds. He has a large amount tied up in U.S. Treasury bills paying 2%. He is considering moving some of his funds from the T-bills
Wally Wilson is a commercial artist who makes a good living by doing freelance work— mostly layouts and illustrations—for local ad agencies and major institutional clients (such as large
Describe the role that dividends and capital gains play in delivering returns to common stock investors.
The historical returns for two investments—A and B—are summarized in the following table for the period 2016 to 2020. Use the data to answer the questions that follow.a. On the basis of a review
What is diversification? How does the risk of a diversified portfolio compare with the risks of the individual assets it contains?
You have been given the following return data on three assets—A, B, and C—over the period 2021–2024.Using these assets, you have decided to analyze three investment alternatives:a. Calculate
Assume you wish to evaluate the risk and return behaviors associated with various combinations of two stocks, Alpha Software and Beta Electronics, under three possible degrees of correlation: perfect
The following table contains annual returns for the stocks of Home Depot (HD) and Lowe’s (LOW). The returns are calculated using end-of-year prices (adjusted for dividends and stock splits)
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 average returns for portfolios that comprise HD and LOW using
Is the CAPM a predictive model? How can investors use the CAPM?
The following table contains annual returns from 2008 to 2017 for two stocks, Consolidated Edison (ED) and Central Valley Community Bancorp (CVCY). Use Excel to create a spreadsheet that calculates
Refer back to the annual returns for Consolidated Edison and Central Valley Bancorp in Problem 5.12. Following are the annual returns on a broad market index from 2008 to 2017.a. On a set of market
The beta of Pacific Ventures is 1.2, and the beta of Delta Growers is 0.8. Which of the following statements is most accurate? Explain.a. Pacific Ventures has higher total risk than Delta Growers.b.
Indicate whether each statement is true or false and provide an explanation for your answer.a. The stock of Deutsche Bank is completely uncorrelated to the overall market. This stock will have an
Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%.
In each of the following cases, calculate the price of one share of foreign stock measured in euros (€).a. A British stock priced at 55 pounds (£) when the exchange rate is 1.16 €/£ (i.e., each
Find and visit the sites of two basic discount brokerages listed in Table 3.4 or any others you know. After exploring the sites, compare them for ease of use, quality of information, availability of
Choose a publicly traded company that has been listed on the Egyptian Exchange (EGX) for at least five years. Use any data source of your choice to find the annual cash dividend paid, if any, by the
Some analysts argue that real interest rates, which have been close to zero in the past year in the U.S., may soon turn negative. Explain how the real interest rate can be negative. Evaluate this
For each of the investments shown in the following table, calculate the rate of return earned over the period. Investment A BUDE C Cash Flow During Period -$ 800 $15,000 $ 7,000 $ 80 $
Choose three NYSE-listed stocks and maintain a record of their dividend payments, if any, and closing prices each week over the next six weeks.a. At the end of the six-week period, calculate the
A local entrepreneur 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
You are evaluating five different investments, all of which involve an upfront outlay of cash. Each investment will provide a single cash payment back to you in the future. Details of each investment
From the Wall Street Journal, a website such as Yahoo! Finance, or some other source, obtain a current estimate of the risk-free rate (use a 10-year Treasury bond). Use the Value Line Investment
From the Wall Street Journal, a website such as Yahoo! Finance, or some other source, obtain a current estimate of the risk-free rate (use a 10-year Treasury bond). Use the Value Line Investment
Obtain a prospectus and an annual report for a major mutual fund that includes some international securities. Carefully read the prospectus and annual report and study the portfolio’s composition
Use Yahoo! Finance or some other source to select four stocks with betas ranging from about 0.50 to 1.50. Record the current market prices of each of these stocks. Assume you wish to create a
Suppose that the risk-free rate is 3% and the expected return on the market portfolio is 10%. A certain stock has a beta of 1.0. You believe that over the next year, this stock will produce a return
Create an Excel spreadsheet that graphs the portfolio return and standard deviation combinations found in Problem 5.10 for Home Depot and Lowe’s.Data From Problem 5.10Use the table of annual
Assume the risk-free rate is 3% and the expected return on the market portfolio is 10%. Use the capital asset pricing model to find the required return for each of the following securities.
Coastal Rail is currently trading at $35 per share. The company pays a quarterly dividend of $0.92 per share. What is the dividend yield?
Create a spreadsheet that applies the variable-growth model to predict the intrinsic value of the Rhyhorn Company common stock. Assume that dividends will grow at a variable rate for the next three
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have
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