Question 1:
Robert Fok is a financial planner specializing in investment planning. One of his clients is interested in investing in a new information technology stock. The client gives Robert the information about the stock in Table 1.
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Table 1 Financial information
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1 Total assets
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$200,000,000
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2 Total liabilities
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$80,000,000
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3 Total preferred stock
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$30,000,000
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4 Total annual preferred stock dividends
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$2,400,000
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5 Net profits after tax
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$25,000,000
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6 Number of shares of common stock outstanding
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5,000,000
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7 Annual common stock dividends
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$2.50 per share
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8 Current market price of the stock
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$50 per share
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Table 2 gives the average stock's dividend yield, book value per share, earnings per share, and P/E ratio for all companies in the information technology sector.
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Table 2 Information technology sector average
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Dividend yield
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4%
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Book value per share
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$17
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Earnings per share
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$4.50
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P/E Ratio
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12
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Required:
1. Using the above information in Table 1, compute the stock's dividend yield, book value per share, earnings per share, and P/E ratio.
2. Assuming the current stock price of this stock is the same as another representative information technology company stock that has the same number of outstanding shares, should Robert recommend that his client buy the stock? Explain.
Question 2:
John Lee is a sophisticated investor. Frequently, he trades Hang Seng Index (HSI) futures contracts and understands the risk involved. Recently, he anticipated that there would be an interest rate hike in the US and that the HSI would likely drop in the next few days.
Required:
1. Based on his HSI prediction and his desire to make some speculative profit, should John buy or sell HSI futures contracts? Explain.
2. John decides to take a position of 10 HSI futures contracts. The following are the settlement prices for the next three days for HSI futures. Calculate John's account balance at the end of trading on 15 November to 17 November with his HSI futures contract position taken in (a).
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Hang Seng Index futures settlement price at the end of the day
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John's Hang Seng Index futures account balance
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11.14 (the day John made the trade)
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22,000
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$500,000 (beginning balance)
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11.15
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22,100
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11.16
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22,300
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11.17
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12,050
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Besides buying or selling HSI futures contracts, John does some speculation with HSI options. Based on the same HSI movement prediction, should he buy or sell HSI call option contracts? Explain.