four questions:
Question 1:
Compute a recent live-year average of the following ratios for three companies of your
choice (attempt to select diverse firms):
a. Retention rate
b. Net profit margin
c. Equity turnover
d. Total asset turnover
e. Total assets/equity
Based on these ratios. explain which firm should have the highest growth rate of earning.
Question 2:
There has been considerable growth in recent years in the use of economic analysis in in
vestment management. Further significant expansion may lie ahead as financial analysts
develop greater skills in economic analysis and these analyses are integrated more into
the investment decision-making process. The following questions address the use of eco-
nomic analysis in the investment decision-making process:
a. (1) Differentiate among leading, lagging, and coincident indicators of economic activity,
and give an example of each.
(2) Indicate whether the leading indicators are useful for achieving above-average in-
vestment results. Briefly justify your conclusion.
b. Interest rate projections are used in investment management for a variety of purposes.
Identify three significant reasons why interest rate forecasts may be important in reach-
ing investment conclusions.
c. Assume you are a fundamental research analyst following the automobile industry for a
large brokerage firm. Identify and briefly explain the relevance of three major economic
time series, economic indicators, or economic data items that would be significant to
automotive industry and company reserch.
Question 3:
Assume the industry you are analyzing is in the fourth stage of the industrial life cycle.
How would you react if your industry-economic analysis predicted that sales per share
for this industry would increase by 20 percent? Discuss your reasoning.
Question 4:
The constant growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.
Assume:
$20 = Price of a Stock Today
8% = Expected Growth Rate of Dividends
$0.60 = Annual Dividend One Year Forward
a. Using only the preceding data, compute the expected long-term total return on the
stock using the constant-growth dividend discount model.
b. Briefly discuss three disadvantages of the constant-growth dividend discount modelin
its application to investment analysis.
c. Identify three alternative methods to the dividend discount model for the valuation of
companies.
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