Question

An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of ​$8 ​billion, pays a relatively high dividend with little increase in​ earnings, and has a​ P/E ratio of 11. Stock Y has a market capitalization of ​$63 billion but does not currently pay a dividend. Stock Y has a​ P/E ratio of 40. Stock​ Z, a housing industry​ company, has a market capitalization of ​$810 million and a​ P/E of 20. a. Classify these stocks according to their market capitalizations. b. Which of the three would you classify as a growth​ stock? Why? c. Which stock would be most appropriate for an aggressive​ investor? d. Which stock would be most appropriate for someone seeking a combination of safety and​ earnings? a. Stock X is classified as a ▼ small-cap mid-cap large-cap stock.  ​(Select from the​ drop-down menu.)

Answer 1

a. The stock with a market capitalization of $8 billion is a mid cap stock , the mid cap stocks have a market capitalization between $2 billion and $10 billion. Stock X is a mid cap stock.

Stock Y is a large cap stock having market capitalization between $10 billion and $200 billion.

Stock Z is Mega cap stock, with a market capitalization of $200 billion and higher.

b.Growth stocks are those stocks which pay little or no dividend as they have a lot of growth opportunities to invest in. So, i would classify Stock Y as a growth stock.

c. Stock Y is a stock which has a very high P/E of 40 ,which indicates that the stock is overvalued, any investor investing in this stock is an aggressive investor. The high P/E may also indicate that the company wants to aggressively increase it's growth and expansion thus suiting the tastes and preferences of an aggressive investor. stock Y is also a growth stock, indicated by its low dividend payout.

d. The STOCK X , provides an investor a combination of safety and earnings as they have been paying high dividends which would provide the investors a stable income and they has a history if paying high dividends .The P/E ratio of this stocks this stock is  low, indicating that the stock is undervalued, so the risk is also low.  So, the correct option is Stock X.