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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

P8.22 AviBank Plastics generated an EPS of $2.75 over the last 12 months. The company’s earnings are expected to grow by 25% next year, and because there will be no significant change in the number
P8.21 You’re thinking about buying some shares in Affiliated Computers and want to use the P/E approach to value the shares. You’ve estimated that next year’s earnings should come in at about
P8.20 Assume you obtain the following information about a certain company: 5LG 5LG Use the constant-growth DVM to place a value on this company’s share.
P8.19 Consolidated Software doesn’t currently pay any dividends but is expected to start doing so in four years. That is, Consolidated will go three more years without paying any dividends, and
P8.18 Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and
P8.17 A particular company currently has sales of $250 million; sales are expected to grow by 20% next year (year 1). For the year after next (year 2), the growth rate in sales is expected to equal
P8.16 New Millennium Company’s share sells at a P/E ratio of 21 times earnings. It is expected to pay dividends of $2 per share in each of the next five years and to generate an EPS of $5 in year
P8.15 Assume there are three companies that in the past year paid exactly the same annual dividend of $2.25 a share. In addition, the future annual rate of growth in dividends for each of the three
P8.14 This year, Southwest Light and Gas (SL&G) paid its shareholders an annual dividend of$3 a share. A major brokerage firm recently put out a report on SL&G stating that, in its opinion, the
P8.13 The price of Consolidated Everything is now $75. The company pays no dividends. Ms Bossard expects the price three years from now to be $100 per share. Should Ms Bossard buy Consolidated
P8.12 Let’s assume that you’re thinking about buying shares in Coast Electronics. So far in your analysis, you’ve uncovered the following information: the share pays annual dividends of $2.50
P8.11 Assume you’ve generated the following information about the shares 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
P8.10 Larry, Moe and Curley are brothers. They’re all serious investors, but each has a different approach to valuing shares. Larry, the oldest, likes to use a one-year holding period to value
P8.9 Danny is considering a share purchase. The share pays a constant annual dividend of$2.00 per share, and is currently trading at $20. Danny’s required rate of return for this share is 12%.
P8.8 Amalgamated Aircraft Parts is expected to pay a dividend of $1.50 in the coming year.The required rate of return is 16%, and dividends are expected to grow at 7% per year. Using the dividend
P8.7 Melissa Popp is thinking about buying some shares of Education Pty Ltd at $50 per share.She expects the price of the shares to rise to $75 over the next three years. During that time she also
P8.4 Goodstuff Corporation has total equity of $500 million and 100 million shares outstanding. Its ROE is 15%. The dividend payout ratio is 33.3%. Calculate the company’s dividends per share
P8.1 An investor estimates that next year’s sales for New World Products should amount to about $75 million. The company has 2.5 million shares outstanding, generates a net profit margin of about
Q8.4 Assume an investor uses the constant-growth DVM to value a share. Listed below are various situations that could affect the computed value of a share. Look at each one of these individually and
Q8.3 Explain the role that the future plays in the share valuation process. Why not just base the valuation on historical information? Explain how the intrinsic value of a share is related to its
Q8.2 In this chapter, we examined nine different share valuation procedures:a. Which one (or more) of these procedures would be most appropriate when trying to put a value on:i. A growth share that
Q8.1 Using the resources available at your campus or public library, select a company from the ASX that would be of interest to you. (Hint: Pick a company that’s been publicly traded for at least
8.10 Briefly describe the price/sales ratio and explain how it is used to value shares. 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 share 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 share valuation
8.8 How would you go about finding the expected return on a share? Note how such information would be used in the share selection process.
8.7 What is the difference between the variable-growth dividend valuation model and the dividends-and-earnings approach to share valuation? Which procedure would work better if you were trying to
8.5 In the share 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 share’s P/E ratio? Is a share’s relative P/E the same thing as the market multiple? Explain.
8.2 Are the expected future earnings of the company important in determining a share’s investment suitability? Discuss how these and other future estimates fit into the share valuation framework.
8.1 What is the purpose of share valuation? What role does intrinsic value play in the share valuation process?
Gain a basic appreciation of the procedures used to value different types of shares, from traditional dividend-paying shares to more growth-oriented shares.
Use other types of presentvalue–based models to derive the value of a share, as well as alternative price-relative procedures.
Determine the underlying value of a share using the zero-growth, constant-growth and variablegrowth dividend valuation models.
Discuss the concepts of intrinsic value and required rates of return, and note how they are used.
Develop a forecast of a share’s expected cash flow, starting with corporate sales and earnings, and then moving to expected dividends and share price.
Explain the role that a company’s future plays in the share valuation process.
3. A variety of financial ratios and measures are provided about one of the computer software companies. These are incomplete, however, so some additional information will have to be calculated.
2. In relation to a study of the computer software industry, briefly note the importance of each of the following.a. Competition from overseas and the Internetb. Export marketsc. The rate of
1. Debra tries to stay informed about the economy on a regular basis. At the present time, most economists agree that the economy, now well into the third year of a recovery, is healthy, with
3. What is your overall assessment of Southern Chemical? Do you think Simms should continue with his evaluation of the shares? Explain.
2. Compare the company ratios you prepared to the industry figures. What are the company’s strengths? What are its weaknesses?
1. Calculate the following ratios, using the Southern Chemical Company figures.
P7.18 The following summary financial statistics were obtained from the 2009 Sandy Bay 6 Marine Motors (SBMM) annual report.
P7.17 Listed on page 242 are the 2009 and 2010 financial statements for Sandy Bay Marine 6 Motors, a major manufacturer of top-of-the-line outboard motors.
P7.16 Listed below are six pairs of shares. Pick one of these pairs and then, using the resources available at your campus or public library (or on the Internet), comparatively analyse the two
P7.15 Using the resources available at your campus or public library (or on the Internet), select any shares you like and determine as many of the profitability, activity, liquidity, leverage and
P7.14 FigureItOut Pty Ltd 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 were the company’s sales and net
P7.13 FigureItOut Pty Ltd 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 FigureItOut Pty Ltd 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 outstanding (the shares trade in the market at $25), earns 10% after taxes on annual sales of$150 million and
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
P7.9 Financial Learning Systems has 2.5 million ordinary shares outstanding and 100 000 preference shares. (The annual preference dividend is $5 a share, and the annual ordinary dividend is 25 cents
P7.8 The following data have been gathered from the financial statements of HiFly 5 Corporation:Calculate the times interest earned ratios for 2009 and 2010. Is the company more or less able to meet
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.
P7.6 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. (Refer to Chapter 4 if necessary.)
P7.5 ZAPIT ordinary shares are selling at a P/E ratio of 15 times trailing earnings. The share price is $25. What were the company’s earnings per share?
P7.4 The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 million shares outstanding. The company has total assets of $75 million and total shareholders’equity of $45
P7.3 BOOKV has $750 000 000 in total assets, no preference shares and total liabilities of$300 000 000. There are 300 000 000 shares outstanding. The share is selling for $5.25. What is the
P7.2 BOOKV has $750 000 000 in total assets, no preference shares and total liabilities of $300 000 000. There are 300 000 000 shares outstanding. What is the book value per share?
P7.1 Assume you are given the following abbreviated financial statement.On the basis of this information, calculate as many liquidity, activity, leverage, profitability and per share measures as you
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 turnover i. Profitability ratiosb. Debt–equity ratio ii. Activity
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 shareb. A cyclical sharec. A telecommunications
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 probably
7.15 Contrast historical standards of performance with industry standards. Briefly note the role of each in analysing the financial condition and operating results of a company
7.14 What is ratio analysis? Describe the contribution of ratio analysis to the study of a company’s financial condition and operating results.
7.13 Why do investors bother to look at the historical performance of a company when future behaviour is what really counts? Explain.
7.12 What is fundamental analysis? Does the performance of a company have any bearing on the value of its shares? Explain.
7.8 What effect, if any, does inflation have on shares?
7.7 Briefly describe each of the following:a. Gross domestic productb. Retail Salesc. Housing approvalsd. Producer prices
7.6 Why is the business cycle so important to economic analysis? Does the business cycle have any bearing on the sharemarket?
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 share? Explain.
7.8 What effect, if any, does inflation have on shares?
7.7 Briefly describe each of the following:a. Gross domestic productb. Retail Salesc. Housing approvalsd. Producer prices
7.6 Why is the business cycle so important to economic analysis? Does the business cycle have any bearing on the sharemarket?
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 share? Explain.
7.1 Identify the three major parts of security analysis and explain why security analysis is important to the share selection process.
Use various financial measures to assess a company’s performance, and explain how the insights derived form the basic input for the valuation process.
Calculate a variety of financial ratios and describe how financial statement analysis is used to gauge the financial vitality of a company.
Demonstrate a basic appreciation of fundamental analysis and why it is used.
Describe industry analysis and note how it is used.
Understand the purpose and contributions of economic analysis.
Discuss the security analysis process, including its goals and functions.
3. Would Dave be going to a different investment strategy if he decided to buy shares in Hydro-Electric? If the switch is made, how would you describe his new investment program? What do you think of
2. Consider the Hydro-Electric shares.a. Determine the amount of annual dividends Hydro-Electric can be expected to pay over the years 2010–2014.b. Calculate the total dollar return that Dave will
1. How would you describe Dave’s present investment program? How do you think it fits him and his investment objectives?
3. What kind of share investment program would you recommend for Sara? What investment objectives do you think she should set for herself, and how can shares help her to achieve her goals?
2. What is your opinion of the four shares Sara has described? Do you think they are suitable for her investment needs? Explain.
1. What do you think of the idea of Sara keeping ‘substantial sums’ of money in savings accounts? Would shares make better investments than savings accounts? Explain.
P6.15 Bruce buys $25 000 of UH-OH Company shares. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the share price falls by
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 shares:(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 share turned in the
P6.12 Using the resources available at your campus or public library, or on the Internet, select any three shares you like and determine the latest book value per share, earnings per share, dividend
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 directors recently declared a cash dividend of 50 cents a share payable on 18 April (a Wednesday) to shareholders
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?P6.9 West Coast Utilities had a net profit of
P6.7 Consider the following information about Truly Good Coffee Company.Total assets $240 million Total debt $115 million Preference shares $25 million Ordinary shareholders’ equity $100 million
P6.6 On 1 January 2010, an investor bought 200 shares of Gottahavit Pty Ltd, for $50 per share. On 3 January 2011, the investor sold the shares for $55 per share. The share paid a quarterly dividend
P6.5 The MedTech Company recently reported net profit after tax of $15.8 million. It has 2.5 million shares outstanding and pays preference dividends of $1 million per year.a. Compute the company’s
P6.4 Lots ov’ Profit Ltd, is trading at $25 per share. There are 250 million shares outstanding.What is the market capitalisation 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% preference shares outstanding. What is the company’s total

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