Lucas Little, a financial planning professional, has been asked by his client to review the financial statements of Stuff Stores Company. Mr. Littles client is considering making a substantial purchase of Stuff Stores stock. Before doing so, the client would like to know a bit more about the financial stability of the company. The information in Table VI.1 should be used to conduct a fundamental analysis of Stuff Stores financial situation.

The Lucas Little Case AN INVESTMENT PLANNING MINI-CASE Lucas Little, a financial planning professional, has been asked by his client to review the financial statements of Stuff Stores Company. Mr. Little's client is considering making a substantial purchase of Stuff Stores stock. Before doing so, the client would like to know a bit more about the financial stability of the company. The information in Table VI.1 should be used to conduct a fundamental analysis of Stuff Stores' financial situation. Table VI.1. Annual Financial Data for Stuff Stores Company ($ millions) Financial Attribute Year 1 Year 2 Current Market capitalization 200,000.5 212,234.0 249,926.5 Total sales 139,208.0 166,809.0 193,295.0 Net income (earnings) 4,430.0 5,377.0 6,295.0 Dividends per share .16 .20 .24 Shares outstanding 4,474.8 4,443.8 4,464.5 Total assets 64,654.0 70,349.0 78,130.0 Debt 16,891.0 18,712.0 18,824.0 Shareholder's equity 19,136.0 24,216.0 31,343.0 Cash flow 7,580.0 8,194.0 9,604.0 Other relevant data include: Beta for Stuff Stores stock: .85 Standard deviation for Stuff Stores stock: 14.5 percent Average return for Stuff Stores stock: 10.5 percent Risk-free rate of return: 4.0 percent Return on the market: 9.0 percent Information on similar stocks is shown in Table VI.2: Table VI.2. Data for Similar Stocks Company Wigwam Stores, Inc. Maryland Markets Pacific Mercantile, Inc. Stock Beta .90 .80 Stock Standard Deviation 15.5% 12.0% 15.0% Average Stock Return 8.0% 9.0% .89 11.0% Please use this information to answer the following questions: 6. Mr. Little's client pointed out during a recent meeting that the price of Stuff Stores Company stock has remained steady during the past six months. The client is convinced that the stock will continue to trade in a narrow range. The client, however, would like to make money on the stock. Which of the following strategies will cause Mr. Little's client to experience the greatest potential loss if Stuff Stores' stock price begins to fluctuate more widely? a. Selling a naked put option. b. Selling a naked call option. c. Selling a covered call option. 7. Assume that Mr. Little's client decides to purchase shares in Stuff Stores stock to add to his sizable portfolio. The client tells Mr. Little that although he is worried about price declines in his portfolio, he does not want to incur the cost of selling the stock or the entire portfolio. The client also does not want to risk mistiming the market should stock prices start to fall. One strategy for the client to protect against a possible decline in both Stuff Stores stock price and the value of the portfolio would be to: a. buy an index call option. b. sell an index call option. c. buy an index put option. d. sell an index put option. e. avoid all options strategies because the client cannot protect against the decline with these options. 8. If the market risk premium were to increase, the value of common stocks, including Stuff Stores Company stock, (holding all other factors constant) would: a. not change because the market risk premium does not affect stock values. b. increase to compensate an investor for increased risk. increase because of higher risk-free rates. d. decrease to compensate an investor for increased risk. decrease because of lower risk-free rates. e. The Lucas Little Case AN INVESTMENT PLANNING MINI-CASE Lucas Little, a financial planning professional, has been asked by his client to review the financial statements of Stuff Stores Company. Mr. Little's client is considering making a substantial purchase of Stuff Stores stock. Before doing so, the client would like to know a bit more about the financial stability of the company. The information in Table VI.1 should be used to conduct a fundamental analysis of Stuff Stores' financial situation. Table VI.1. Annual Financial Data for Stuff Stores Company ($ millions) Financial Attribute Year 1 Year 2 Current Market capitalization 200,000.5 212,234.0 249,926.5 Total sales 139,208.0 166,809.0 193,295.0 Net income (earnings) 4,430.0 5,377.0 6,295.0 Dividends per share .16 .20 .24 Shares outstanding 4,474.8 4,443.8 4,464.5 Total assets 64,654.0 70,349.0 78,130.0 Debt 16,891.0 18,712.0 18,824.0 Shareholder's equity 19,136.0 24,216.0 31,343.0 Cash flow 7,580.0 8,194.0 9,604.0 Other relevant data include: Beta for Stuff Stores stock: .85 Standard deviation for Stuff Stores stock: 14.5 percent Average return for Stuff Stores stock: 10.5 percent Risk-free rate of return: 4.0 percent Return on the market: 9.0 percent Information on similar stocks is shown in Table VI.2: Table VI.2. Data for Similar Stocks Company Wigwam Stores, Inc. Maryland Markets Pacific Mercantile, Inc. Stock Beta .90 .80 Stock Standard Deviation 15.5% 12.0% 15.0% Average Stock Return 8.0% 9.0% .89 11.0% Please use this information to answer the following questions: 6. Mr. Little's client pointed out during a recent meeting that the price of Stuff Stores Company stock has remained steady during the past six months. The client is convinced that the stock will continue to trade in a narrow range. The client, however, would like to make money on the stock. Which of the following strategies will cause Mr. Little's client to experience the greatest potential loss if Stuff Stores' stock price begins to fluctuate more widely? a. Selling a naked put option. b. Selling a naked call option. c. Selling a covered call option. 7. Assume that Mr. Little's client decides to purchase shares in Stuff Stores stock to add to his sizable portfolio. The client tells Mr. Little that although he is worried about price declines in his portfolio, he does not want to incur the cost of selling the stock or the entire portfolio. The client also does not want to risk mistiming the market should stock prices start to fall. One strategy for the client to protect against a possible decline in both Stuff Stores stock price and the value of the portfolio would be to: a. buy an index call option. b. sell an index call option. c. buy an index put option. d. sell an index put option. e. avoid all options strategies because the client cannot protect against the decline with these options. 8. If the market risk premium were to increase, the value of common stocks, including Stuff Stores Company stock, (holding all other factors constant) would: a. not change because the market risk premium does not affect stock values. b. increase to compensate an investor for increased risk. increase because of higher risk-free rates. d. decrease to compensate an investor for increased risk. decrease because of lower risk-free rates. e