Question

a. What is stock screening. Provide an example of technical stock screening. Provide an example of fundamental stock screening.

b. Stock with high PE ratios are deemed to be growth stocks while stocks with low PE ratios are typically called value stock. Explain why.

c. A risk analyst gives Oracle Corporation, the enterprise software and database management firm, a CAPM equity beta of 1.20. The risk free rate is 4.0 percent. Compute the cost of equity assuming that the stock market global portfolio returns 10 percent per year.

d. At the end of May 2011, analysts were forecasting earnings of 2.17 per share for the fiscal year ending May 31, 2012. They were also forecasting that the P/E ratio would be 20 on May 31, 2012. The company is expected to pay $0.24 in dividends per share for the fiscal year. Calculate the current value of the stock in May 2011 for this P/E forecast. (Hint: use your answer to part c).

Answer 1

a  

Stock screening is the process of searching for companies that meet certain financial criteria. A stock screener has three components:

• A database of companies
• A set of variables
• A screening engine that finds the companies that satisfy those variables and generates a list of matches
• technical screening is looking at charts of prices and fundamental screening is looking at historical financial data

b

• Growth stocks are considered stocks that have the potential to outperform the overall market over time because of their future potential

hence their PE ratio is high because their price is based on future returns

• Value stocks may trade below what they are really worth and will therefore theoretically provide a superior return.

hence their PE is low because they are trading at lower prices.

c