Question: 1 Assume that at the time Ed asks your advice

1. Assume that at the time Ed asks your advice, the rate of return on U.S. Treasury bills is 5 percent and that a market risk premium of 8 percent seems appropriate. Using the 1998–2007 dividend growth rate, do you think Ed should buy the stock? Explain your answer. Suppose you use the dividend growth rate indicated for 2008 and 2009 instead of the 1998–2007 rate; what is your answer then? Which rate do you feel is the more appropriate? Explain.
2. Rather than using a dividend approach, suppose you prefer to judge a stock’s value by using a price-to-earnings analysis. Based on the available data, does this approach indicate the stock is a good buy? Explain your answer.
3. Does the stock’s price chart help you in making a decision? Explain.
4. What do you think of Ed’s hunch? Do you feel he has information that might not be available to investors in general? Does the information given suggest that other investors are not aware of Antogen’s prospects for growth? Explain.
Ed Driessen is in a management trainee program at Leyton and Leyton Company, a manufacturer of business forms and accounting systems. During his first month on the job (January 2008), Ed was assigned to the sales department to become familiar with its operations. In reviewing customer accounts, Ed noticed a substantial increase in orders from Antogen, Inc., a hospital supplies company with diverse interests in that area. Since most of these orders were for invoices, purchase orders, and other forms related to sales, Ed reasoned that Antogen might be on the verge of increasing its sales and profits rapidly. If this were to happen, its common stock might be a very good buy. Before buying, however, Ed thought it would be a good idea to research the stock at the local library. One day during his lunch hour, he stopped there and gathered some data and made a photocopy of Antogen’s price chart. Ed isn’t quite sure how to use all this information, but his friend indicates that it shows fairly good performance and that Ed’s investment should work out well. Ed is ready to buy the stock but first he would like your opinion. He is single and has good insurance coverage, and his position with Leyton and Leyton seems very secure and promising for the future.

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  • CreatedMarch 19, 2015
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