Questions and Answers of Fundamentals Of Investing

A four-month call option contract on 100 shares of Bayer AG common stock with a strike price of €60 can be purchased for €600. Assuming that the market price of Bayer AG stock rises to €75 per
A call option on a bank with a strike price of €16 (Euro) expires in one year and has a current price of €2.5. The market price of the underlying stock is €16.5, and the risk-free rate is 0.1%.
Max Houck holds 600 shares of Boulder Gas and Light. He bought the stock several years ago at $52.75, and the shares are now trading at $78. Max is concerned that the market is beginning to soften.
Nick Fitzgerald holds a well-diversified portfolio of high-quality large-cap stocks.The current value of Fitzgerald’s portfolio is $825,000, but he is concerned that the market is heading for a big
Fabrizio just bought 1,000 shares of Intesa Sanpaolo Bank at €2.51 (Euro). He wants to write a covered call on the stocks to increase his profits. He sells 10 calls on the stock at a market price
Wolfgang owns stock in a pharmaceutical company he believes is highly undervalued. He expects that the stock will significantly increase in value over the long term. He is concerned, however, that
Suppose that EURO STOXX 50 stands at 3,500. Alfonso wants to set up a long straddle by purchasing 100 calls and an equal number of puts on the index, both of which expire in three months and have a
HSBC stock trades at £475.8 (Pound sterling) per share. A call option on the stock has a strike price of £490 and an expiration date of six months. The volatility of the stock’s return has been
John has been following the stock market very closely over the past 18 months and has a strong belief that future stock prices will be significantly higher. He has two alternatives that he can
Can the broad market have an effect on the price of individual stocks? Explain.
At the end of the last trading day on the Nikkei 225, 171 stocks advanced, 49 stocks declined, and five stocks were unchanged. What is the value of the advance-decline line for that day?
You look at a large number of firms that announced higher-than-expected sales growth and notice that the stocks of these firms were rising quickly prior to these public announcements. Does that
Compute the level of on-balance volume (OBV) for the following five-day period for a stock. The beginning level of OBV is 50,000, and the beginning price is $35.Is this stock following a bullish
Following are figures representing the number of stocks in the EURO STOXX 50 Index making new highs and new lows for each month over a six-month period in 2019:
Maurizio hears Michelle Cialtrone, a notorious Italian market analyst, say on television that the advance/decline ratio for the last market session was 1.5. What does that mean?
DRACO common stock is selling at a P/E of 13 times trailing earnings. The stock price is $17. What are the firm’s earnings per share?
Three companies that compete in the footwear market are Foot Locker, Finish Line, and DSW. The following table shows inventory levels and cost of goods sold for each company for the 2017, 2016, and
Tsuyoshi from Problem 8.30 decides to use another approach to value Hino. He plans to use the price-to-sales ratio to value the stock, and he has collected P/S multiples for the same car
Suppose you look back over the past 10 years and identify firms that have increased dividends every year. You notice that these stocks outperformed the broader market over the decade too. Does this
Hino is a young car manufacturer and has yet to make a profit. Tsuyoshi is trying to place a value on Hino’s stock, but it pays no dividends and he obviously cannot calculate a P/E ratio. As
If small stocks outperform large stocks, does that violate market efficiency? If yes, why? If not, what else would have to be true to conclude that the pattern did violate market efficiency?
Which of the following facts, if true, would violate the weak form of the efficient markets hypothesis?a. Stocks earn higher returns than bonds over time.b. You can earn better-than-average returns
The Carmignac Patrimoine mutual fund earned a 6% return last year and had a beta of 1.25. The New Germany fund earned a return of 8.5% and had a beta of 1.5. The riskfree rate was 1%, and the market
Lynx Auto generated an EPS of $3.50 over the last 12 months. The company’s earnings are expected to grow by 20% next year, and, because there will be no significant change in the number of shares
You’re thinking about buying some stock in Affiliated Computer Corporation and want to use the P/E approach to value the shares. You’ve estimated that next year’s earnings should come in at
You are interested in purchasing the common stock of Azure Corporation. The firm recently paid a dividend of $3.00 per share. It expects its earnings—and, hence, its dividends—to grow at a rate
From Yahoo! Finance or another online source, select a company that’s been listed for at least 10 years and find out dividends per share for 10 years. Use an Excel spreadsheet like the template
Brembo is an acclaimed world leader and innovator in the field of automotive disc brake technology. It doesn’t pay any dividends currently but is expected to start doing so in four years. This
GenCap Advisory has just given Banca Mediolanum a strong buy recommendation. As a result, you decide to analyze and value the company’s stock. Here’s what you find: This year Banca Mediolanum
Nextbig Corp. currently has sales of $870 million; sales are expected to grow by 26% next year (year 1). For the year after next (year 2), the growth rate in sales is expected to equal 13%. Over each
In 2018, Audi AG paid its stockholders an annual dividend of €4.80 per share. A major brokerage firm recently put out a report on Audi predicting that the company’s annual dividends would grow at
The price of a share of the Qatar Construction Co. is now QR20 (Qatari riyal). The company pays no dividends. Serag El Din Gassem expects the price to be QR30 per share three years from now. Should
Jack is considering a stock purchase. The stock pays a constant annual dividend of $3.00 per share and is currently trading at $21. Jack’s required rate of return for this stock is 13%. Should he
Analysts have forecasted that Volkswagen AG will pay a dividend of €4.86 per share in the coming year. Investors require a 5% rate of return on the company’s shares, and they expect dividends to
You have been asked to analyze the financial statements of the Dayton Corporation for the two years ending 2018 and 2019.a. Create a comparative balance sheet for the years 2019 and 2018, similar to
Pierre Francois is thinking about buying some shares of Renault SA at €60.85 per share. He expects the price of the stock to rise to €70.0 over the next two years. During that time he also
Marc Dodier is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been following one of the hottest issues on Wall
Last year, Black Hole Company paid $90 million of interest expense, and its average rate of interest for the year was 15%. The company’s ROE is 20%, and it pays no dividends. Estimate next year’s
The following table lists the 2018 and 2019 financial statements for Otago Bay Marine Motors, a major manufacturer of top-of-the-line outboard motors.Otago Bay Marine Motors Balance Sheets ($ in
In 2018, Peugeot had a ROE of 14.4%. Its earnings per share were 3.16, and its dividends per share were €0.97. Estimate Peugeot’s growth rate.
Hydra Corporation has total equity of $300 million and 120 million shares outstanding. Its ROE is 20%. The EPS is 25%. Calculate the company’s dividends per share (round to the nearest penny).
Sirius Lawnmower Co. has total equity of $450 million and 150 million shares outstanding. Its ROE is 18%. Calculate the company’s EPS.
The following table shows 2017 total revenues, cost of goods sold, earnings available for common stockholders, total assets, and stockholders’ equity for three companies competing in the bottled
The following table shows key financial data for three companies in the automobile manufacturing industry: Toyota, Nissan, and Honda. All values are in millions of yen.a. Calculate each of the
Taurus Corp. had sales of $35 million in 2016 and is expected to have sales of $51,230,000 for 2017. The company’s net profit margin was 4% in 2016 and is expected to increase to 6% by 2017.
An investor in Amman, Jordan, estimates that next year’s sales for Amman Intercontinental Hotels, Inc. would amount to about 150 million Jordanian dinar. The company has 10 million shares
Using the Internet, compare the following pairs of stocks. For each pair, determine which stock is fundamentally stronger and holds more promise for the future? Compute (or obtain) as many ratios as
Using the Internet, find the following information about Peugeot S.A. stock for 2018: net income after tax, total equity, total assets, and total liabilities. Compute the liquidity and leverage
El Dorado Corporation has a net profit margin of 7%, a total asset turnover of 2.5 times, total assets of $1.2 billion, and total equity of $650 million. What are the company’s sales and net profit?
Pisces Pools Inc. has a net profit margin of 4%, a total asset turnover of 2.2, total assets of $350 million, and total equity of $195 million. What is the company’s return on equity?
Using the individual tax rate schedule shown in Table 1.2, perform the following:a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of partnership
P. Chater Enterprises Inc. has a total asset turnover ratio of 2.6 and a net profit margin of 7%. What is the company’s return on assets?
Find the EPS, P/E ratio, and dividend yield of a company that has six million shares of common stock outstanding (the shares trade in the market at $30), earns 12% after taxes on annual sales of $80
The Al Hammad Company has total assets of QR18 million (Qatari riyal), an asset turnover of 1.35 times, and a net profit of 16% on sales.a. What is Al Hammad’s return on assets?b. Find Al
Briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. How economic issues fit into industry analysis.
In 2018, Bayer AG generated net profits (after taxes) of €2,117 million, reported sales of €14,647 million, and had 933 million common shares outstanding. It pays €1.5 per share in common
The following data have been gathered from the financial statements of Atlantia SpA (in millions of euros):Calculate the times interest earned ratios for 2017 and 2018. Is the company more or less
For its fiscal year ending on December 31, 2018, BMW AG reported net income of €6,117 million from sales of €99,095 million. The company also reported total assets of €171,622 million.a.
In 2018, BMW AG had a P/E ratio of 6.53 and analysts were projecting a growth rate of 5.2% per year in 2019, 2020, and 2021. What was BMW’s PEG ratio?
Bayer AG had net profits of €2,117 million, sales of €14,647 million, and 933 million shares outstanding in 2018. The company had total assets of €83,502 million and total stockholders’
A firm has 1.5 million shares of common stock outstanding with a book value of $10 per share. The firm also has total assets with a book value of $12 million. There is no preferred stock. What are
Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, identify each of the following and note how each would probably behave in a
In January 2016 an investor purchased 800 shares of Engulf & Devour, a rapidly growing high-tech conglomerate. From 2016 through 2020, the stock turned in the following dividend and share price
Bjørn bought 300 shares of Danske Bank A/S for DKK170 (Danish krone) per share on October 1, 2018. Unfortunately, a major newspaper reveals the very next day that the bank is being investigated for
Wolfgang and Martha who live in Zurich, Switzerland, have been dating for years and are now thinking about getting married. As a financially sophisticated couple, theywant to think through the tax
From 1999 to 2017, the average IPO rose by 18.4% in its first day of trading. In 1999, 117 deals doubled in price on the first day. What factors might contribute to the huge first-day returns on
MuleSoft, Inc. conducted its IPO on March 17, 2017, for the principal purposes of increasing its capitalization and financial flexibility, creating a public market for its Class A common stock, and
Emma would like to purchase one hundred shares of Barclays PLC through her Hargreaves Lansdown brokerage account. Hargreaves Lansdown charges a £7 commission for online trades. Emma logs on into her
An investor in the U.S. owns some shares of a European company that was worth 10,000 euros, and wants to sell them. The euro/U.S. dollar exchange rate is currently 0.925884, meaning that 1 dollar
Banjo who lives in Sydney purchased 50 shares of Deutsche Bank, a German stock traded on the Frankfurt Exchange for €10 per share exactly one year ago when the exchange rate was 1.6 A$/€ (i.e.,
Manuel purchased 100 shares of GlaxoSmithKline, a UK pharmaceutical firm when they were trading for £1,400 (pounds sterling) and the exchange rate between British pounds and euros was €1.3 per
Francesco buys 1,000 shares of Italgas at €3.5 per share, putting up a 75% margin.a. What is the debit balance in this transaction?b. How much equity funds must Francesco provide to make this
Barbara Simmons purchased 100 shares of Home Depot stock for $187 per share, using as little of her own money as she could. Her broker has a 55% initial margin requirement and a 45% maintenance
An investor short sells 75 shares of a stock for $69 per share. The initial margin is 60%, and the maintenance margin is 40%. The price of the stock falls to $57 per share. What is the margin, and
An investor short sells 75 shares of a stock for $69 per share. The initial margin is 60%, and the maintenance margin is 40%. The price of the stock rises to $82 per share. What is the margin, and
You are an investor and expect the price of a start-up’s shares to drop in the near future in response to an expected failure in technology. As a result, you sell 200 shares of this company at
Over the past 10 years, Molly O’Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a totalmarket value of
Ashley Morgan estimates that if he does 15 hours of research using data that will cost $90, there is a good chance that he can improve his expected return on a $20,000, one year investment from 7% to
An investor buys a bond for $1,000. The bond pays $40 in interest every six months. After two years, the investor sells the bond for $980. Describe the types of income or loss the investor had.
Assume you purchased a share of stock in Volkswagen AG at the beginning of 2019 for €136.26. A year later the stock was worth €156.62 and paid a dividend of €12.5 in 2019. Calculate the
Assume you purchase a bond for $870. The bond pays $25 interest every six months. You sell the bond after 18 months for $950. Calculate the following:a. Incomeb. Capital gain or lossc. Total return
Below are the prices on the first and last day of the year for Netflix common stock for several recent years.Netflix paid no dividends over this period. Calculate the return that an investor would
Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?
Given a real rate of interest of 3%, an expected inflation premium of 1.5%, and risk premiums for investments A and B of 5% and 6.5%, respectively, find the following:a. The risk-free rate of return,
Calculate a one-year holding period return for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain. Cash received 1st quarter 2nd
The risk-free rate is 4.8%, and expected inflation is 3.2%. If inflation expectations change such that future expected inflation rises to 4.5%, what will the new risk-free rate be?
Assume that an investment generates the following income stream and can be purchased at the beginning of 2020 for $2,000 and sold at the end of 2026 for $2,200. Estimate the IRR for this investment.
Rudolf is considering purchasing a German government bond that pays annual interest of €50 per €1,000 of par value. The bond matures in one year, and at that time he will collect the par value
Lachlan is going to invest NZ$4,000 today in an investment that promises to return NZ$9,000 in exactly 10 years.a. Use the present value technique to estimate the IRR of his investment.b. If Lachlan
Yasser Ben Rashid must earn a minimum rate of return of 12% to be adequately compensated for the risk of the following investment:a. Estimate the IRR on this investment.b. On the basis of your
Josef Samir is an investor in the Egyptian Exchange (EGX). He invests E£5,000 (Egyptian pound) in a cement company and receives dividends of E£65, 75, 76, and 76 over the next four years. At the
Rania Farouk must earn a return of 12% on an investment that requires an initial outlay of $2,000 and promises to return $6,000 in eight years.a. Estimate the IRR on this investment.b. On the basis
The table below shows the dividends per share paid in 2008 and 2018 for three companies. For each company, estimate the compound annual dividend growth rate over this decade.
A company paid a dividend of $1.50 per share in 2009 and announced that it will pay a dividend of $2.75 in 2016. Estimate the compound annual growth rate of the dividends.
In 2008, Volkswagen AG reported total revenue of €113.81 billion. Ten years later, it generated €236 billion in revenue. What was the compound annual growth rate in revenue from 2008 to 2018?
Refer to Problem 5.3. Assume that asset 1 represents 40% of the portfolio and asset 2 is 60%. Calculate the average return and standard deviation of this portfolio’s returns over the six-year
You have three portfolios containing four assets each. The following table specifies the weights assigned to each asset in each of the three portfolios, along with each asset’s beta:a. Calculate
Referring to Problem 5.20, assume you have a portfolio with $20,000 invested in each of investments A, B, and C. What is your portfolio beta?Data From Problem 5.20Assume the betas for securities A,
A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10
Jane is considering investing in three different stocks or creating three distinct twostock portfolios. Jane views herself as a rather conservative investor. She is able to obtain historical returns

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