Case Problem 6.1 Sara Decides to Take the Plunge
This paper is due TODAY AT 10.30 PM no later.
Complete the following:
- Case Problem 6.1 A-C (page 252)
- Case Problem 6.2 A-C (page 252)
- Case Problem 7.1 A-C (page 293)
- Case Problem 7.2 A-C (page 294)
- Case Problem 8.1 A-B (page 332)
- Case Problem 8.2 A-B (page 333)
- Case Problem 9.2 A-C (page 374)
Format your submission consistent with APA guidelines.
Case problem 6.1 A-C
Case Problem 6.1 Sara Decides to Take the Plunge
1. LG 1
2. LG 6
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 low-yielding 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?
Case Problem 6.2 A-C
Case Problem 6.2 Wally Wonders Whether There’s a Place for Dividends
- LG 5
- LG 6
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 Hydro-Electric 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
- How would you describe Wally’s present investment program? How do you think it fits him and his investment objectives?
- Consider the Hydro-Electric stock.
- Determine the amount of annual dividends Hydro-Electric can be expected to pay over the years 2016 to 2020.
- 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.
- 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.
- 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?
Case Problem 7.1 A-C
Case Problem 7.1 Some Financial Ratios Are Real Eye-Openers
1. LG 5
2. LG 6
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 Averages | Latest Industry Averages | ||
| Liquidity | Profitability | ||
| a. Net working capital | N/A | h. Net profit margin | 8.5% |
| b. Current ratio | 1.95 | i. Return on assets | 22.5% |
| Activity | j. ROE | 32.2% | |
| c. Receivables turnover | 5.95 | Common-Stock Ratios | |
| d. Inventory turnover | 4.50 | k. Earnings per share | $2.00 |
| e. Total asset turnover | 2.65 | l. Price-to-earnings ratio | 20.0 |
| Leverage | m. Dividends per share | $1.00 | |
| f. Debt-equity ratio | 0.45 | n. Dividend yield | 2.5% |
| g. Times interest earned | 6.75 | o. Payout ratio | 50.0% |
| p. Book value per share | $6.25 | ||
| q. Price-to-book-value ratio | 6.4 |
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.
Case Problem 7.2 A-C
Case Problem 7.2 Doris Looks at an Auto Issue
Doris Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and operates a highly successful modeling agency. Doris manages her modest but rapidly growing investment portfolio, made up mostly of high-grade common stocks. Because she’s young and single and has no pressing family requirements, Doris has invested primarily in stocks that offer the potential for attractive capital gains. Her broker recently recommended an auto company stock and sent her some literature…
