mdoule 4 assignment

Case 7.2

Doris Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and operates a highly successful modeling agency. Doris manages her modest but rapidly growing invest- ment portfolio, made up mostly of high-grade common stocks. Because she’s young and single and has no pressing family requirements, Doris has invested primarily in stocks that offer the potential for attractive capital gains. Her broker recently recommended an auto company stock and sent her some literature and analytical reports to study. One report, prepared by the bro- kerage house she deals with, provided an up-to-date look at the economy, an extensive study of the auto industry, and an equally extensive review of several auto companies (including the one her broker recommended). She feels strongly about the merits of security analysis and believes it is important to spend time studying a stock before making an investment decision.

Questions

a. Doris 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 industrial activity remaining strong. What other information about the economy do you think Doris would find helpful in evaluating an auto stock? Prepare a list—and be specific. Which 3 items of economic information (from your list) do you feel are most important? Explain.

b. In relation to a study of the auto industry, briefly note the importance of each of the following.

1. Auto imports 2. The United Auto Workers union 3. Interest rates 4. The price of a gallon of gas

c. A variety of financial ratios and measures are provided about one of the auto companies and its stock. These are incomplete, however, so some additional information will have to be com- puted. Specifically, we know the following:

Given this information, calculate the following:

1. Sales

2. Net profits after taxes

3. Current ratio

4. Market price of the stock

5. Dividend yield

Case 8.1

Chris Norton is a young Hollywood writer who is well on his way to television superstardom. After writing several successful television specials, he was recently named the head writer for one of TV’s top-rated sitcoms. Chris fully realizes that his business is a fickle one and, on the advice of his dad and manager, has decided to set up an investment program. Chris will earn about a half-million dollars this year. Because of his age, income level, and desire to get as big a bang as possible from his investment dollars, he has decided to invest in speculative, high-growth stocks.

Chris is currently working with a respected Beverly Hills broker and is in the process of building up a diversified portfolio of speculative stocks. The broker recently sent him informa- tion on a hot new issue. She advised Chris to study the numbers and, if he likes them, to buy as many as 1,000 shares of the stock. Among other things, corporate sales for the next 3 years have been forecasted as follows:

Questions

a.Looking first at the stock:

1. Compute the company’s net profits and EPS for each of the next 3 years.

2. Compute the price of the stock 3 years from now.

3. Assuming that all expectations hold up and that Chris buys the stock at $70, determine

his expected return on this investment.

4. What risks is he facing by buying this stock? Be specific.

5. Should he consider the stock a worthwhile investment candidate? Explain.

b. Looking at Chris’s investment program in general:

1. What do you think of his investment program? What do you see as its strengths and weak-nesses?

2. Are there any suggestions you would make?

3. Do you think Chris should consider adding foreign stocks to his portfolio? Explain.