Module 5 assignment

Case 9.2

Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in investments at the local university. The textbook for the course was, in fact, this one, and the class just completed this chapter. Excited about what she has learned in class, Deb has decided that she definitely wants to invest in stocks. But before she does, she wants to use her newfound knowledge in technical analysis to determine whether now would be a good time to enter the market.

Deb has decided to use all of the following measures to help her determine if now is, indeed, a good time to start putting money into the stock market:

• Advance-decline line

• New highs-new lows indicator (Assume the current 10-day moving average is 0 and the last 10 periods were each 0.)

• Arms index

• Mutual fund cash ratio

Deb goes to the Internet and, after considerable effort, is able to put together the accompa- nying table of data.

Questions

a. Based on the data presented in the table, calculate a value (where appropriate) for periods 1 through 5, for each of the 4 measures listed above. Chart your results, where applicable.

b. Discuss each measure individually and note what it indicates for the market, as it now stands. Taken collectively, what do these 4 measures indicate about the current state of the market? According to these measures, is this a good time for Deb to consider getting into the market, or should she wait a while? Explain.

c. Comment on the time periods used in the table, which are not defined here. What if they were relatively long intervals of time? What if they were relatively short? Explain how the length of the time periods can affect the measures.

Case 10.2

It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating results of the company issuing the bond. Just as financial ratios can be used in the analysis of common stocks, they can also be used in the anal- ysis of bonds—a process we refer to as credit analysis. In credit analysis, attention is directed toward the basic liquidity and profitability of the firm, the extent to which the firm employs debt, and the ability of the firm to service its debt.

The financial ratios shown above are often helpful in carrying out such analysis. The first 2 ratios measure the liquidity of the firm, the next 2 its profitability, the following 2 the debt load, and the final 2 the ability of the firm to service its debt load. (For ratio 5, the lower the ratio, the better. For all the others, the higher the ratio, and the better.) The table lists each of these ratios for 6 companies.

Questions

a. Three of these companies have bonds that carry investment-grade ratings. The other 3 com- panies carry junk-bond ratings. Judging by the information in the table, which 3 companies have the investment-grade bonds and which 3 have the junk bonds? Briefly explain your selections.