FINANCE Investment Analysis and Portfolio Manage

 FINANCE  Investment Analysis and Portfolio Management CHAPTER  12 QUESTIONS

1  Why   would   you   expect   a   relationship   between   economic   activity   and   stock   price   movements



2.     At   a   lunch   with   some   business   associates,   you   discuss   the   reason   for   the   relationship   between the economy and the stock market. One of your associates contends that she has   heard that stock prices typically turn before the economy does. How would you explain   this phenomenon?  


3.     Explain the following statements  ：  (a)There is a strong, consistent relationship between   money   supply   changes   and   stock   prices.   (b)Money   supply   changes   cannot   be   used   to   predict stock price movements. 

4.     You are informed of the following estimates  ：  Nominal money supply is expected to grow   at a rate of 7 percent, and GDP is estimated to grow at 4 percent. Explain what you think   will happen to stock prices during this period and the reason for your expectation. 


5.     The current rate of inflation is 3 percent, and long-term Treasury bonds are yielding 7   percent. You estimate that the rate of inflation will increase to 6 percent. What do you   expect to happen to long-term bond yields? Compute the effect of this change in inflation   on the price of a 15-year, 10 percent coupon bond with a current yield to maturity of 8   percent.  


6.     Some   observers   contend   that   it   is   harder   to   estimate   the   effect   of   a   change   in   interest   rates on common stocks than on bonds. Discuss this contention. 


   7.     An   investor   is   convinced   that   the   stock   market   will   experience   a   substantial   increase   next year because corporate earnings are expected to rise by at least 12 percent. Do you   agree or disagree? Why or why not?   



  9.     To arrive at an estimate of the net profit margin, why would you spend time estimating   the operating profit margin and work down?  


10.     You   are   convinced   that   capacity   utilization   next   year   will   decline   from   82   percent   to   about   79   percent.   Explain   what   effect   this   change   will   have   on   the   operating   profit   margin.  


11.     You   see   an   estimate   that   hourly   wage   rates   will   increase   by   6   percent   next   year.   How   does this affect your estimate of the operating profit margin? What other information do   you need to determine the effect of this wage rate increase and why do you need it?  



  12.     It   is   estimated   that,   next   year,   hourly   wage   rates   will   increase   by   7   percent   and   productivity will increase by 5 percent. What would you expect to happen to unit labor   cost?   Discuss   how   this   unit   labor   cost   estimate   would   influence   your   estimate   of   the   operating profit margin.   


   13. Assume that each of the following changes id independent (i.e., except for this change, all   other   factors   remain   unchanged).In   each   case,   indicate   what   will   happen   to   the   earnings   multiplier and explain why         a. The return on equity increases         b. The aggregate debt-equity ratio declines         c. Overall productivity of capital increases         d. The dividend-payout ratio declines