This is an INDIVIDUAL assignment. Submit your answers in hardcopy at the beginning of class. Check the syllabus for the due date. Handwritten answers are NOT acceptable. Use Word to write your answers.
Chapter 4: Investing
Please choose a publicly traded company that you find interesting or would like to invest in, and find their ticker symbol on www.money.msn.com or www.finance.yahoo.com.
Two factors have been shown significant in determining the long-run performance of stocks:
- The size of the company, known as “market capitalization” (often shortened to “market cap”)
- The price of the stock, relative to its book value (price to book)
- Go to http://www.morningstar.com/ and enter the ticker for your chosen stock in the “Quote” box at the top. Record the following information:
- Scroll down to the section labeled Company Profile and record the following information:
- In your own words (i.e. do NOT cut and paste), describe what the company does.
Proctor and Gamble (P&G) also known as P&G is a multinational consumer goods company with its headquartering located in Ohio, USA. The products of the company include cleaning agents, pet foods and personal care products. The company was also in the marketing of foods and beverages. P&G earned net revenue of US$ 84.17 billion with net income provision of US$ 11.31 billion in the year 2013 .
- Refer to p. 86-87 of the Wall Street Journal Complete Personal Finance Guidebook.
- How are growth stocks defined?
According to the Wall Street Journal (WSJ), shares in a company whose core earnings are expected to grow at an above the market average is known as Growth Stock.
- What values are their P/E ratios expected to have?
Their P/E ratio expected to have a value of 16.9 times the investment in particular
- How are value stocks defined?
A stock that trends to trade and have a lower price relative to its fundamentals in particular, like its dividend, sales, earnings and others but considered as undervalue from a value investor.
- What values are their P/E ratios expected to have?
The value of the stock of P&G is high; hence the company is expecting to have high number of P/E ratio in particular.
- Right now, the average stock has a Forward P/E of about 15. Based on the Forward P/E ratio of your stock and your answers to #4 above, is your stock a growth stock or a value stock?
The forward P/E ratio of Proctor & Gamble (P&G) is 16.9, while the average Forward P/E is 15, therefore the amount of P/E of P&G is higher than that of market average, and hence it is noted down as a growth stock.
- The “Stock Style” is determined by the market cap and the valuation ratios (Forward P/E and P/B). The first word (large, mid, small) describes the market cap, and the second word (value, core, growth) describes the valuation ratio.Did your answer to question 5 match the “Stock Style” description of your stock?
The company has a large market capitalization while the style of the stock is Growth.
- Now, browse to http://www.google.com/finance and enter the ticker for your stock in the search field at the top.
- Record the beta for your stock:
- Based on the beta, would you expect your stock to be less volatile or more volatile than the average stock (market)? (Note: the market has a beta = 1.0.)
Half Volatile than the market
- The world’s richest person is not Bill Gates, Warren Buffett, or Saudi King Abdullah. Instead, it is someone whose name you may have never heard: Carlos Slim. Mr. Slim is the Chairman of the Board and CEO ofTelefonos de Mexico (Telmex). If you want to buy stock in Mr. Slim’s company, how would you do so?(Refer to page 98 of the Wall Street Journal Complete Personal Finance Guidebook)
We will buy the shares of the company of Telefonos de Mexico (Telmex), and would also analyze its stocks in particular in order to reach on a certain decision.
- Rather than buying its stock, another way to invest in a company is to buy one of its outstanding bonds. If you do so, you face (at least) two types of risk: credit risk and interest rate risk. Describe each of these types of risk. (Refer to page 106-107 of the Wall Street Journal Complete Personal Finance Guidebook.)
Credit Risk: The risk of loss of principal or loss of a certain financial reward arises from the failure of borrower’s to repay a loan to meet a contractual obligation. On the other hand, interest rate risk is yet another important type of risk which arises with movement in the interest in either side
- Go back to http://www.morningstar.com/ and enter the ticker for your assigned stock. Click on the tab labeled “Bonds” (located under your stock name and ticker symbol) and see if your firm has any bonds listed. (If there are no bonds listed, enter this ticker: WMT and proceed as described below.)
- Scroll down until you see the list of outstanding bonds, as shown below. Click twice on the “Maturity Date” column header to sort the bonds with the longest maturity at the top.
- Record the following information for the longest maturity bond:
- Currently, interest rates are near all-time lows. They can’t go down much more, but they can increase substantially. Because the economy is showing signs of growth, or inflation appears to be rising, the Fed (Federal Reserve Bank) is likely to raise interest rates.
- Download the WSJ-02.xlsx spreadsheet attached to this assignment on BbLearn.
- Enter the information for your bond in the yellow boxes only. The face value should be entered as $1,000. The coupon rate and yield to maturity should be entered as percentages (do not convert to decimals).
- The column to the right (column C) shows what will happen to the price of your bond if interest rates rise 1%. This is your interest rate risk exposure.
- How much money (in dollars and percent) will you lose if rates rise by a mere 1%?
Morningstar. Morning star. 17 February 2014. 18 February 2014 <http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=PG&Country=usa>.