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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

8.10 Briefly describe the price/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?
8.9 Briefly describe the P/E approach to stock valuation and note how this approach differs from the variable-growth DVM. Describe the P/CF approach and note how it is used in the stock valuation
8.8 How would you go about finding the expected return on a stock? Note how such infor- mation would be used in the stock selection process.
8.7 What is the difference between the variable-growth dividend valuation model and the dividends-and-earnings approach to stock valuation? Which procedure would work better if you were trying to
8.6 Briefly describe the dividend valuation model and the three versions of this model. Explain how CAPM fits into the DVM.
8.5 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
8.4 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.
8.3 Can the growth prospects of a company affect its price/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
8.2 Are the expected future earnings of the firm important in determining a stock's invest- ment suitability? Discuss how these and other future estimates fit into the stock valua- tion framework.
8.1 What is the purpose of stock valuation? What role does intrinsic value play in the stock valuation process?
LG6 Gain a basic appreciation of the procedures used to value different types of stocks, from traditional dividend-paying shares to more growth-oriented stocks.
LG5 Use other types of present- value-based models to derive the value of a stock, as well as alternative price-relative procedures.
LG4 Determine the underlying value of a stock using the zero-growth, constant-growth, and variable-growth dividend valuation models.
LG3 Discuss the concepts of intrinsic value and required rates of return, and note how they are used.
LG2 Develop a forecast of a stock's expected cash flow, starting with corporate sales and earnings, and then moving to expected dividends and share price.
LG1 Explain the role that a company's future plays in the stock valuation process.
P7.22 At the beginning of the chapter you read abour an analyst's report on Dell Inc. Use an online sources such as Yahoo! Finance or Dell's own Web site to look up the company's income state- ment
P7.20 Doris Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and oper- ates a highly successful modeling agency. Doris manages her modest but rapidly growing invest- ment
P7.19 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
P7.18 The following summary financial statistics were obtained from the 2009 Otago Bay Marine Motors (OBMM) annual report. Net sales Total assets Net earnings Shareholders' equity 2009 (S in
P7.17 Listed here are the 2009 and 2010 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,
P7.16 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
P7.15 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,
P7.14 FigureItOut Corporation has a net profit margin of 8%, a total asset turnover of 2 times, total assets of $1 billion, and total equity of $500 million. What were the company's sales and net
P7.13 FigureltOut Corporation has a net profit margin of 8%, a total asset turnover of two times, total assets of $1 billion, and total equity of $500 million. What is the company's return on equity?
P7.12 FigureltOut Corporation has a net profit margin of 8% and a total asset turnover of two times. What is the company's return on assets?
P7.11 Find the EPS, P/E ratio, and dividend yield of a company that has 5 million shares of common stock outstanding (the shares trade in the market at $25), carns 10% after taxes on annual sales of
P7.10 The Buffalo Manufacturing Company has total assets of $10 million, an asset turnover of 2.0 times, and a net profit margin of 15%.a. What is Buffalo's return on assets?b. Find Buffalo's ROE,
P7.9 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
P7.8 The following data have been gathered from the financial statements of HiFly Corporation: 2009 2010 Operating profit $550,000,000 $600,000.000 Interest expense 200,000,000 250,000,000 Taxes
P7.7 Highgate Computer Company produces $2 million in profits from $28 million in sales. It has total assets of $15 million.a. Calculate Highgate's total asset turnover and its net profit margin.b.
7.5%. P7.5 ZAPIT common stock is selling at a P/E of 15 times trailing earnings. The stock price is $25. What were the firm's earnings per share? P7.6 PEGCOR has a P/E ratio of 15. Earnings per share
P7.4 The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 mil- lion shares of common stock outstanding. The company has total assets of $75 million and total
P7.3 BOOKV has $750,000,000 in total assets, no preferred stock, and total liabilities of $300,000,000. There are 300,000,000 shares of common stock outstanding. The stock is selling for $5.25 per
P7.2 BOOKV has $750,000,000 in total assets, no preferred stock, and total liabilities of $300,000,000. There are 300,000,000 shares of common stock outstanding. What is the book value per share?
P7.1 Assume you are given the following abbreviated financial statement. ($ in millions) Current assets Fixed and other assets Total assets Current liabilities Long-term debt Stockholders' equity
Q7.3 Match the specific ratios in the left-hand column with the category in the right-hand column to which it belongs.a. Inventory turnoverb. Debt-equity ratioc. Current ratiod. Net profit margine.
Q7.2 As an investor, what kind(s) of economic information would you look for if you were thinking about investing in the following?a. An airline stockb. A cyclical stockc. An electrical utility
Q7.1 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 prob- ably
7.11 What are the four stages of an industry's growth cycle? Which of these stages offers the biggest payoff to investors? Which stage is most influenced by forces in the economy?
7.10 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.
7.9 What is industry analysis, and why is it important?
7.8 What effect, if any, does inflation have on common stocks?
7.7 Briefly describe each of the following:a. Gross domestic product.b. Leading indicators.c. Money supply.d. Producer prices.
7.6 Why is the business cycle so important to economic analysis? Does the business cycle have any bearing on the stock market?
7.5 Describe the general concept of economic analysis. Is this type of analysis necessary. and can it really help the individual investor make a decision about a stock? Explain.
7.4 Would there be any need for security analysis if we operated in an efficient market envi- ronment? Explain.
7.3 How would you describe a satisfactory investment vehicle? How does security analysis help in identifying investment candidates?
7.2 What is intrinsic value? How does it fit into the security analysis process?
7.1 Identify the three major parts of security analysis and explain why security analysis is important to the stock selection process.
LG6 Use various financial measures to assess a company's performance, and explain how the insights derived form the basic input for the valuation process.
LG5 Calculate a variety of financial ratios and describe how financial statement analysis is used to gauge the financial vitality of a company.
LG4 Demonstrate a basic appreciation of fundamental analysis and why it is used.
LG3 Describe industry analysis and note how it is used.
LG2 Understand the purpose and contributions of economic analysis.
LG1 Discuss the security analysis process, including its goals and functions.
P6.19 On February 29, 2009, GE announced plans to cut its quarterly dividend from $0.31 to $0.10 per share.a. If GE has 10.6 billion shares outstanding, how much cash will GE save each year by
P6.18 Build a spreadsheet containing the quoted information below. Based on the information given, what is the current market cap of the firm? What was the firm's net income. City National Corp.
P6.17 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
P6.16 Sara Thomas is a child psychologist who has built up a thriving practice in her hometown of Boise, Idaho. Over the past several years she has been able to accumulate a substantial sum of money.
P6.15 Bruce buys $25,000 of UH-OH Corporation stock. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the stock price falls
P6.14 George Robbins considers himself to be an aggressive investor. At the present time, he's thinking about investing in some foreign securities. In particular, he's looking at two stocks: (1)
P6.13 In January 2006, an investor purchased 800 shares of Engulf & Devour, a rapidly growing high-tech conglomerate. Over the five-year period from 2006 through 2010, the stock turned in the
P6.12 Using the resources available 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,
P6.11 Southern Cities Trucking Company has the following five-year record of earnings per share. Year EPS 2006 $1.40 2007 2.10 2008 1.00 2009 3.25 2010 0.80 Which of the following procedures would
P6.10 Wilfred Nadeau owns 200 shares of Consolidated Glue. The company's board of direc- tors recently declared a cash dividend of 50 cents a share payable April 18 (a Wednesday) to shareholders of
P6.9 West Coast Utilities had a net profit of $900 million. It has 900 million shares outstanding and paid annual dividends of $0.90 per share. What is the dividend payout ratio?
P6.8 East Coast Utilities is currently trading at $28 per share. The company pays a quarterly dividend of $0.28 per share. What is the dividend yield?
P6.7 Consider the following information about Truly Good Coffee, Inc. Total assets Total debt Preferred stock Common stockholders' equity Net profits after taxes Number of preferred stock outstanding
P6.6 On January 1, 2010, an investor bought 200 shares of Gottahavit, Inc., for $50 per share. On January 3, 2011, the investor sold the stock for $55 per share. The stock paid a quarterly divi- dend
P6.5 The MedTech Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million per year.a.
P6.4 Lots ov' Profit, Inc., is trading at $25 per share. There are 250 million shares outstanding. What is the market capitalization of this company?
P6.3 Kracked Pottery Company has total assets of $2.5 million, total short- and long-term debt of $1.8 million, and $200,000 worth of 8% preferred stock outstanding. What is the firm's total book
P6.2 An investor deposits $20,000 into a new brokerage account. The investor buys 1,000 shares of Tipco stock for $19 per share. Two weeks later, the investor sells the Tipco stock for $20 per share.
P6.1 An investor owns some stock in General Refrigeration & Cooling. The stock recently underwent a 5-for-2 stock split. If the stock was trading at $50 per share just before the split, how much is
Q6.6 Briefly define each of the following types of investment programs and note the kinds of stock (blue chips, speculative stocks, etc.) that would best fit with each.a. A buy-and-hold strategy.b. A
Q6.5 Identify and briefly describe the three sources of return to U.S. investors in foreign stocks. How important are currency exchange rates? With regard to currency exchange rates, when is the best
Q6.4 Assume that a wealthy individual comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she
Q6.3 Listed below are three pairs of stocks. Look at each pair and select the security you would like to own, given that you want to select the one that's worth more money. Then, after you make all
Q6.2 Given the information in the Wall Street Journal quote in Figure 6.4 (page 216), answer the following questions for Harley Davidson Inc.a. On what day did the trading activity occur?b. At what
Q6.1 Look at the record of stock returns in Table 6.1, particularly the return performance during the 1970s, 1980s, 1990s, and 2000-2008.a. How would you compare the returns during the 1970s with
6.17 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?
6.16 With all the securities available in this country, why would a U.S. investor want to buy for- eign stocks? Briefly describe the two ways in which a U.S. investor can buy stocks in a foreign
6.15 Why do most income stocks offer only limited capital gains potential? Does this mean the outlook for continued profitability is also limited? Explain.
6.14 Define and briefly discuss the investment merits of each of the following.a. Blue chips.b. Income stocks.c. Mid-cap stocks.d. American Depositary Receipts.e. IPOs.f. Tech stocks.
6.13 What are dividend reinvestment plans, and what benefits do they offer to investors? Are there any disadvantages?
6.12 What is the difference between a cash dividend and a stock dividend? Which would be more valuable to you? How does a stock dividend compare to a stock split? Is a 200% stock dividend the same as
6.11 Why is the ex-dividend date important to stockholders? If a stock is sold on the ex-dividend date, who receives the dividend-the buyer or the seller? Explain.
6.10 Briefly explain how the dividend decision is made. What corporate and market factors are important in deciding whether, and in what amount, to pay dividends?
6.9 What is an odd-lot differential and what effect does it have on the cost of buying and selling stocks? How can you avoid odd-lot differentials? Which of the following transac- tions would involve
6.8 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
6.7 What is a stock spin-off? In very general terms, explain how a stock spin-off works. Are these spin-offs of any value to investors? Explain.
6.6 What is a stock split? How does a stock split affect the market value of a share of stock? Do you think it would make any difference (in price behavior) if the company also changed the dividend
6.5 What are some of the advantages and disadvantages of owning common stock? What are the major types of risk to which stockholders are exposed?
6.4 How important are dividends as a source of return to common stock? What about capital gains? Which is more important to total return? Which causes wider swings in total return?
6.3 Briefly describe the behavior of the U.S. stock market over the last half of the 20th century and the early part of the 21st century.
6.2 What are two or three of the major investment attributes of common stocks?
6.1 What is a common stock? What is meant by the statement that holders of common stock are the residual owners of the firm?
LG6 Describe various types of common stocks, including foreign stocks, and note how stocks can be used as investment vehicles.
LG5 Discuss common stock dividends, types of dividends, and dividend reinvestment plans.

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