I need yellow highlighted work edited and changed in your own words in order to avoid the plagiarism. Yellow highlighted word count is nearly 2000 words and case study 9.2 also needs to be answered.
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Case Problem 6.1 Sara Decides to Take the Plunge
Sara Thomas is a child psychologist who has built a thriving practice in her hometown of Boise,
Idaho. Over the past several years she has been able to accumulate a substantial sum of money.
She has worked long and hard to be successful, but she never imagined anything like this. Even
so, success has not spoiled Sara. Still single, she keeps to her old circle of friends. One of her
closest friends is Terry Jenkins, who happens to be a stockbroker and who acts as Sara’s
financial advisor.
Not long ago Sara attended a seminar on investing in the stock market, and since then she’s been
doing some reading about the market. She has concluded that keeping all of her money in lowyielding savings accounts doesn’t make sense. As a result, Sara has decided to move part of her
money to stocks. One evening, Sara told Terry about her decision and explained that she had
found several stocks that she thought looked “sort of interesting.” She described them as follows:
•
North Atlantic Swim Suit Company. This highly speculative stock pays no dividends.
Although the earnings of NASS have been a bit erratic, Sara feels that its growth prospects
have never been brighter—“what with more people than ever going to the beaches the way
they are these days,” she says.
•
Town and Country Computer. This is a long-established computer firm that pays a modest
dividend yield (of about 1.50%). It is considered a quality growth stock. From one of the
stock reports she read, Sara understands that T&C offers excellent long-term growth and
capital gains potential.
Southeastern Public Utility Company. This income stock pays a dividend yield of around
5%. Although it’s a solid company, it has limited growth prospects because of its location.
International Gold Mines, Inc. This stock has performed quite well in the past, especially
when inflation has become a problem. Sara feels that if it can do so well in inflationary times,
it will do even better in a strong economy. Unfortunately, the stock has experienced wide
•
•
price swings in the past. It pays almost no dividends.
Questions
a. What do you think of the idea of Sara keeping “substantial sums” of money in savings
accounts? Would common stocks make better investments for her than savings accounts?
Explain.
b. What is your opinion of the four stocks Sara has described? Do you think they are
suitable for her investment needs? Explain.
c. What kind of common stock investment program would you recommend for Sara? What
investment objectives do you think she should set for herself, and how can common
stocks help her achieve her goals?
A In my opinion there should be planned investment. Investment should done in a proper
Way. A part of the saving should be kept in saving account or fixed deposit, a part in
mutual fund, a part in real estate and remaining may be in stock market .I would advise
not to invest substantial part of her saving in stock market. Instead of saving in bulk she
should invest systematically. She should understand the stock market and price
fluctuation.
It is hard to say that common stock will be better saving than normal saving account.
Initially She should invest a part of her saving in the common stock and check the return.
Return should include notional loss also. If Sara invests with full of analysis and
calculation investment in common stock may be better than saving account.
B. Out of all the four stocks
11. North Atlantic Swim Suit Co. :
It would advise not to invest because it is speculative share and company is not paying
any dividend. She is new in the market so she should not invest in this share.
2. Town & Country Computer:
Payment of dividend is modest but there is potential of long term growth so being a
New investor she may consider to invest in this share. Dividend is irrespective if
company is strong and return may be greater than saving account.
3. South Eastern Public Utility Company:
Payment of dividend is 5 % but growth potential is limited because of geographical
restriction. If Sara is getting income in the form of interest which is less than 5% then
she should consider to invest in this share otherwise no.
4. International Gold Mines Inc.
Gold falls under commodity and during the inflation companies which are into
Commodity market either do well or worse. During the inflation gold rate had
touched all time high so company had done well. Company is not paying any dividend
so I would advise her not to invest in this company.
C. In my opinion I would advise Sara to invest in the common stock in two ways. No. 1
Invest in the market through mutual funds where mutual fund will invest after proper
analysis and due diligence. No. 2 invest in those companies which have good track and
reputation irrespective they are paying dividend.
She should set goal for herself. In this process she should analysis income which she
earned in the past Now in future she should analysis her income from the stock market
on monthly basis if earning is more than the saving account interest she should continue
her investment. In case if income is less than the saving account interest she should not
consider the same. She can achieve through proper analysis and systematic investment.
Case Problem 6.2 Wally Wonders Whether There’s a Place for Dividends
Wally Wilson is a commercial artist who makes a good living by doing freelance work—mostly
layouts and illustrations—for local ad agencies and major institutional clients (such as large
department stores). Wally has been investing in the stock market for some time, buying mostly
high-quality growth stocks as a way to achieve long-term growth and capital appreciation. He
feels that with the limited time he has to devote to his security holdings, high-quality issues are
his best bet. He has become a bit perplexed lately with the market, disturbed that some of his
growth stocks aren’t doing even as well as many good-grade income shares. He therefore decides
to have a chat with his broker, Al Fried.
During their conversation, it becomes clear that both Al and Wally are thinking along the same
lines. Al points out that dividend yields on income shares are indeed way up and that, because of
the state of the economy, the outlook for growth stocks is not particularly bright. He suggests
that Wally seriously consider putting some of his money into income shares to capture the high
dividend yields that are available. After all, as Al says, “the bottom line is not so much where the
payoff comes from as how much it amounts to!” They then talk about a high-yield public utility
stock, Hydro-Electric Light and Power. Al digs up some forecast information about HydroElectric and presents it to Wally for his consideration:
Year
Expected EPS ($)
Expected Dividend Payout Ratio (%)
2016
$3.25
40%
2017
$3.40
40%
2018
$3.90
45%
2019
$4.40
45%
2020
$5.00
45%
The stock currently trades at $60 per share. Al thinks that within five years it should be trading at
$75 to $80 a share. Wally realizes that to buy the Hydro-Electric stock, he will have to sell his
holdings of CapCo Industries—a highly regarded growth stock that Wally is disenchanted with
because of recent substandard performance.
Questions
a. How would you describe Wally’s present investment program? How do you think it fits
him and his investment objectives?
Wally has limited time to devote to his investment program and this one appears to be a long
term growth plan which seems right for him.
b. Consider the Hydro-Electric stock.
1. Determine the amount of annual dividends Hydro-Electric can be expected to pay
over the years 2016 to 2020.
(1)
Year
(2)
Expected EPS($)
(1X2)
ExpdDiv Payout Ratio
Expected
Divid
2016
$3.25
40%
$ 1.30
2017
3.40
40
1.36
2018
3.90
45
1.76
2019
4.40
45
1.98
2020
5.00
45
2.25
2. Compute the total dollar return that Wally will make from Hydro-Electric if he
invests $6,000 in the stock and all the dividend and price expectations are
realized.
He could purchase 100 shares of stock ( 6,000/60)
Year
Dividends Share
100 Shares
Total
2016
$ 1.30
100
$ 130.00
2017
1.36
100
136.00
2018
1.76
100
176.00
2019
1.98
100
198.00
2020
2.25
100
225.00
Total dividends for 5 years is $ 865.00 If the stock is selling at 80.00 per share in 5 years then his
100 shares would be $ 8,000.00 so his capital gains would be $ 2,000.00 ( 8,000-6,000=2,000)
So his total return would be $ 2,865.00
3. If Wally participates in the company’s dividend reinvestment plan, how many
shares of stock will he have by the end of 2020? What will they be worth if the
stock trades at $80 on December 31, 2020? Assume that the stock can be
purchased through the dividend reinvestment plan at a net price of $50 a share in
2016, $55 in 2017, $60 in 2018, $65 in 2019, and $70 in 2020. Use fractional
shares, to 2 decimals, in your computations. Also, assume that, as in part b, Wally
starts with 100 shares of stock and all dividend expectations are realized.
(1)
(2)
(3)
(4)
Year
# of share beg year
Dividends per share
Purchase Price
No of Shares Purc
(5)
(6)= (4/5)
Total Dividends
2016
100.00
1.30
130.00
50.00
2.60
2017
102.60
1.36
139.54
55.00
2.54
2018
105.14
1.76
185.05
60.00
3.08
2019
108.22
1.98
214.28
65.00
3.30
2020
111.52
2.25
250.92
70.00
3.58
So he would have 15.10 more shares by the end of 2017
If the shares were traded at 80.00 a share then his shares would be worth $ 9208.00 (115.1 x 80)
c. Would Wally be going to a different investment strategy if he decided to buy shares in
Hydro-Electric? If the switch is made, how would you describe his new investment
program? What do you think of this new approach? Is it likely to lead to more trading on
Wally’s behalf? If so, can you reconcile that with the limited amount of time he has to
devote to his portfolio?
No he would not be going in a different direction if he decides to buy shares in Hydro-Electric,
but rather changing the thrust of it which is common in aggressive investors in a long term plan.
If or when things change Wally would go back investing in his long term stocks and that way
his trading did increase, but since it is a limited amount of trades it should not affect his time.
Case Problem 7.1 Some Financial Ratios Are Real Eye-Openers
Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman.
He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact
that he thoroughly evaluates each stock he invests in. As Jack says, “You can’t be too
careful about these things! Anytime I plan to invest in a stock, you can bet I’m going to learn as
much as I can about the company.” Jack prefers to compute his own ratios even though he could
easily obtain analytical reports from his broker at no cost. (In fact, Bob Smith, his broker, has
been volunteering such services for years.)
Recently Jack has been keeping an eye on a small chemical stock. The firm, South Plains
Chemical Company, is big in the fertilizer business—which is something Jack knows a lot about.
Not long ago, he received a copy of the firm’s latest financial statements (summarized here) and
decided to take a closer look at the company.
Cash
$ 1,250
Accounts receivable
$ 8,000
Current liabilities
$10,000
Inventory
$12,000
Long-term debt
$ 8,000
Current assets
$21,250
Stockholders’ equity
$12,000
Fixed and other assets
$ 8,750
Total liabilities and
Total assets
$30,000
stockholders’ equity
$30,000
South Plains Chemical Company Balance Sheet ($ thousands)
Sales
$50,000
Cost of goods sold
$25,000
Operating expenses
$15,000
Operating profit
$10,000
Interest expense
$ 2,500
Taxes
$ 2,500
Net profit
$ 5,000
Dividends paid to common stockholders ($ in thousands)
$ 1,250
Number of common shares outstanding
5 million
Recent market price of the common stock
$ 25
South Plains Chemical Company Income Statement ($ thousands)
Questions
a. Using the South Plains Chemical Company figures, compute the following ratios.
Latest Industry
Latest Industry
Averages
Averages
Liquidity
a. Net working
Profitability
N/A
h. Net profit margin
8.5%
1.95
i. Return on assets
22.5%
j. ROE
32.2%
capital
b. Current ratio
Activity
c. Receivables
5.95
Common-Stock Ratios
d. Inventory turnover
4.50
k. Earnings per share
$2.00
e. Total asset
2.65
l. Price-to-earnings ratio
20.0
turnover
turnover
Latest Industry
Latest Industry
Averages
Averages
Leverage
m. Dividends per share
$1.00
f. Debt-equity ratio
0.45
n. Dividend yield
2.5%
g. Times interest
6.75
o. Payout ratio
50.0%
p. Book value per share
$6.25
q. Price-to-book-value
6.4
earned
ratio
b. Compare the company ratios you prepared to the industry figures given in part a. What
are the company’s strengths? What are its weaknesses?
c. What is your overall assessment of South Plains Chemical? Do you think Jack should
continue with his evaluation of the stock? Explain.
Part (a)
a) Net working capital
= Current assets – Current liabilities
= $ 21,250,000 – $ 10,000,000
= $ 11,250,000
b) Current ratio
=
$ 21,250,000
= $ 10,000,000
= 2.125
c) Receivables turnover
=
=
$ 50,000,000
$ 8,000,000
= 6.25
d) Inventory turnover
=
$ 50,000,000
= $ 12,000,000
= 4.167
e) Total asset turnover
=
$ 50,000,000
= $ 30,000,000
= 1.67
f) Debt-equity ratio
−
= ℎ ′
$ 8,000,000
= $ 12,000,000
= 0.67
g) Times interest earned
=
=
$10,000,000
$ 2,500,000
= 4.0
h) Net profit margin
=
$ 5,000,000
= $ 50,000,000
= 10%
i) Return on assets
=
$ 5,000,000
= $ 30,000,000
= 16.67 %
j) Return on equity
= ℎ ′
$ 5,000,000
= $12,000,000
= 41.67 %
k) Earnings per share
−
= ℎ
=
$ 5,000,000
5,000,000
= $ 1.00
l) Price/earnings ratio
=
ℎ
$ 25
= $1
= 25x
m) Dividends per share
=
=
$ 1,250,000
5,000,000
= $ 0.25 per share
n) Dividend yield
ℎ
= ℎ
$ 0.25
= $ 25 x 100%
=1%
o) Payout ratio
ℎ
= ℎ
$0.25
= $1
= 0.25
p) Book value per share
ℎ ′
= ℎ
=
$ 12,000,000
5,000,000
= $ 2.40 per share
q) Price-to-book-value ratio
=
ℎ
$ 25
= $ 2.40
= 10.42
Part (b)
Compare liquidity
We can see that the SPC company’s net working capital is $ 11,250,000. This indicate that the
SPC Company has $ 11.25 million of working capital available to pay its bill and grow the
business. This value is a good sign for SPC Company, because it is higher amount than the
industry average.
Current Ratio
2.125
2.15
2.1
2.05
1.95
2
SPC Company
Industry Average
1.95
1.9
1.85
SPC Company
Industry Average
Current ratio
2.125
1.95
Next, we can see the current ratio for SPC company is 2.125 that is more than 0.175 when compare
to industry average, 1.95. This indicate that SPC Company is able to pay its accounts creditor on
time and get the discounts for prompt payment and credibility from future supplies. SPC Company
may able to do essential maintenance and replacement of fixed assets, it will result in reduce
operating expenses, such that selling expenses and depreciation expenses. Also, the company has
liquid cash for new investment project, which may increase future growth rate of the company.
This ratio is a good sign for the company.
Compare activity ratio
Activity Ratio
7
6.25 5.95
6
4.167
5
4.5
4
2.65
3
1.67
2
1
0
SPC Company
Industry Average
Receivables
turnover
6.25
Inventory turnover
4.167
Total asset
turnover
1.67
5.95
4.5
2.65
SPC Company
Industry Average
From the graph above, we can see that the receivables turnover for SPC Company is 6.25 that is
more than 0.3 when compare to industry average, 5.95. This means that the SPC Company
collecting its accounts receivable (sales to customers on credit) more quickly than industry
average. The SPC Company may have a valuable discipline on credit control, resulting the
potential
for
bad
debt
decrease.
It
is
good
for
SPC
Company.
However, the inventory turnover for SPC Company is 4.167 that is less than 0.333 when compare
to industry average, 4.5. This is due to the SPC Company may have too much inventories in hand
than industry average. It is expensive because inventories take up costly warehouse space, some
inventories may become spoiled or obsolete and also high risk of stock pilferage.
The total asset turnover for SPC Company is 1.67 that is less than 0.98 when compare to industry
average, 2.65. This indicate that the company is less able to squeeze out more sales dollars out of
its assets than industry average. The company should reduce the selling price in order to achieve
higher sales volume, especially if that business line is in nature very price competitive. When the
sales volume increase, given no new investment in fixed assets, then the total asset turnover will
increase.
Compare Profitability Ratio
We can see that the net profit margin, ROA, and ROE for SPC Company is 10%, 16.67%, 41.67%
compare to the industry average, 8.5%, 22.5% and 32.2% respectively. Results are mixed.
Compare Common Stock Ratios
We can see that the dividends per share for SPC Company is $ 0.25 that is less than $ 0.75 when
compare to the industry average, $ 1.00. This amount of dividends paid out to the common
stockholder is less than the average.
Also, the dividend yield for SPC Company is 1 % that is less than 1.5 % when compare to the
…
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