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 and analytical reports to study. One report, prepared by the brokerage house she deals with, provided an up-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, now well into the third year of a recovery, is healthy, with industrial activity remaining strong. What other information about the economy do you think Doris would find helpful in evaluating an auto stock? Prepare a list-and be specific. Which 3 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:
Net profit margin 15%
Total assets $25 billion
Earnings per share $3.00
Total asset turnover 1.5
Net working capital $3.4
Payout ratio 40%
Current liabilities $5 billion
Price-to-earnings ratio 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