Question

Q1.

James, a high school guidance counselor in South Park, Colorado, has purchased several corporate and government bonds over the years, and his total bond investments now exceeds $40,000. His kid brother Patrick, a highly paid physician, has more than $150,000 invested in various blue-chip income stocks in a variety of industries.

a. Justify James’s attitude toward bond investments.

b. Justify Patrick’s attitude toward stock investments.

Q2.

Ji Wu of Troy, New York, has $5,000 that he wants to invest in the stock market. Ji is in college on a scholarship and does not plan to use the $5,000 or any dividend income for another five years, when he plans to buy a home. He is currently considering a small company stock selling for $25 per share with an EPS of $1.25. Last year, the company earned $900,000, of which $250,000 was paid out in dividends.

a. Select two ways of evaluating stocks using corporate earnings that you think Ji would utilize when investing in stocks. Explain why.

Answer 1

Q 1 --- CORPORATE AND THE GOVERNMENT BONDS -- These kinds of bonds are the kind of share or bonds provided to the public to incur the flow of investment to them through the purchasing of the bond by the public . The corporate sectors and the government both offers the bond to the public in the market .

BLUE - CHIP STOCK -- The blue chip stock is the investment on the high valued goods for the long terms . This one of the stable type of the stock which is secure for the long term investors . They don't need to worry about the loss of the stock even at the time when the stock market is experiencing the bear market because generally they use to get recovered .

( A ) JAME is a high school guidance counselor in South Park, Colorado as per his profession he is having that much of time to invest and sell the stock he have purchased . As per his salary also he is able to invest in the corporate bonds and the government bonds . So , to earn more he use to purchase bonds for short period of time and use to buy it and sell it at time when high amount of profit can be generated for it .

( B ) Where as Partick is the highly paid physician, due to which he can afford to invest in the blue chip stocks and he may be don't have that much of time to look after his securities to earn more profit and selling it and investing in the new place . So , its beneficial for Patrick to investing in blue chip stocks because its stable in nature , having no risks and recover at the situation of bear market .

Q 2 --  Two ways of evaluating stocks using corporate earnings ​​​​​​​that Ji would utilize when investing in stocks --

1-  The most common measure for stocks is the price to earnings ratio, known as the P/E​​​​​​​ . Its takes the companies shares price and divide it with the value of the companies total net earnings , This measures in available in stock table . As a general rule of thumb, stocks with P/Es higher than the broader market P/E are considered expensive, while stocks with a below-market P/E are considered cheaper.​​​​​​​

2- Another popular measure is the P/S ( price to sale) , this also measured by dividing the price of the stock by sale of the stock , it one of the easy method to evaluate the stock and can also be easily found by studying the stock table .

by one the above methods presented , Ji can evaluate the value to the stock in the capital market and the rate of returns they are providing . If the value of the returns is more than the overall market . If the stock is in the right status in the market and is out of the heavy risk then its good for Ji to buy them . For that to he must analyse the past stock data of the stock in the market and the returns in the former years .