Question

G5 Doris Wise is a young career woman. She lives young career woman. She lives in Phoenix, Arizona, where she owns and oper- ates a highly successful modeling agency. Doris manages her modest but rapidly growing inve ment portfolio, made up mostly of high-grade common stocks 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 heaker recently recommended an auto company stock and sent her some literature and analytical reports to study. One report, prepared by the bro kerage house she deals with provided an un to date look at the economy, an extensive study of the auto industry, and an equally extensive review of several auto companies (including the one her broker recommended). She feels strongly about the merits of security analysis and believes it is important to spend time studying a stock before making an investment decision. Questions a. Doris tries to stay informed about the economy on a regular basis. At the present time, most economists agree that the economy is getting stronger. What information about the economy do you think Doris would find helpful in evaluating an auto stock? Prepare a list- and be specific. Which three items of economic information (from your list) do you feel are most important? Explain. b. In relation to a study of the auto industry, briefly note the importance of each of the following 1. Auto imports 2. The United Auto Workers union 3. Interest rates 4. The price of a gallon of gas c. A variety of financial ratios and measures are provided about one of the auto companies and its stock. These are incomplete, however, so some additional information will have to be computed. Specifically, we know the following: 15% $25 billion $3.00 1.5 Net profit margin Total assets Earnings per share Total asset turnover Net working capital Payout ratio Current liabilities Price-to-earnings ratio $3.4 billion 40% $5 billion 12.5 Given this information, calculate the following: 1. Sales 2. Net profits after taxes 3. Current ratio 4. Market price of the stock 5. Dividend yield

Please show how to get from A to B

Answer 1

(a): The information about the economy that Doris will find helpful are:

• GDP growth rate
• Inflation
• Unemployment rate
• Order book of manufactures
• Industrial production
• Current account deficit

The three items of economic information that I feel are most important in this case are – GDP growth rate, inflation and industrial production. GDP or gross domestic product is the market value of all goods and services produced in the economy. A healthy and consistent GDP growth is a reflection of a strong economy and a strong economy augurs well for an auto stock. Secondly when inflation is high then prices are rising. In such a situation demand will most likely fall. Thus a low inflation rate will be good for the auto sector as a whole. The third factor is the level of industrial production. Factory output is measured by IIP i.e. index of industrial production. High level of IIP is an indicator of healthy economy and hence bodes well for the auto sector.

(b): (1): Auto imports – The auto company stock will be in a better position if the level of auto imports is low and the market demand is largely satisfied by domestic players. This will give the selected auto stock a better grip of the market.

(2): The United Auto Workers union – This is also an important factor or element for the auto industry. F the union is too strong and makes unreasonable demands or goes on strikes for too long then the interest of the auto industry will be harmed in the long run.

(3): Interest rates – This is also an important factor. Low interest rates will propel demand while high interest rates will keep demand subdued.

(4): The price of a gallon of gas – This is also an important factor. Sustained levels of high gasoline prices will keep the demand for vehicles muted as it will increase ownership costs. On the other hand low levels of gasoline prices will keep cost of ownership low and this will propel demand for new vehicles in the economy.