Fin630 GDB No. 2 solution

Semester "Spring 2011"

"Investment Analysis & Portfolio Management (Fin 630)"

This is to inform that Graded Discussion Board (GDB) will be opened according to the following schedule

Schedule

Opening Date and Time 
May 31 , 2011 At 12:01 A.M. (Mid-Night)Closing Date and Time 
June 02 , 2011 At 11:59 P.M. (Mid-Night)

Topic/Area for Discussion

" VALUE VS GROWTH INVESTING "

Note: The discussion question will be from the area/topic mentioned above. So start learning about the topic now.
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Company A has net income of Rs.560 million; company has 40 million outstanding shares which are currently trading at Rs.200 per share. 

Company B has net income of Rs.480 million; company has 30 million outstanding shares which are currently trading at Rs.150 per share. 

What is PE ratio for Company A? 
What is PE ratio for Company B?

Company A has Relative PE ratio of 1.1 times and Relative Price to Book ratio of 1.25 times.

Company B has Relative PE ratio of 1 times and Relative Price to Book ratio of 0.50 times.

According to Morningstar classification (based on Magic number) which Company’s stock is value stock? 

According to Morningstar classification (based on Magic number) which Company’s stock is Growth stock? 

Your answer should be in such format:
1. PE ratio for Company A =??

2. PE ratio for Company B =??

3. According to Morningstar classification which Company’s stock is value stock =???

4. According to Morningstar classification which Company’s stock is growth stock =???


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Solution:


1. PE ratio for Company A =14.28571

2. PE ratio for Company B =9.375

3. According to Morningstar classification which Company’s stock is value stock = Company B Stock is a Value Stock

4. According to Morningstar classification which Company’s stock is growth stock =Company A Stock is a Growth Stock


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1. PE ratio for Company A = 14.29

2. PE ratio for Company B = 9.38

3. According to Morningstar classification which Company’s stock is value stock = Company B 
4. According to Morningstar classification which Company’s stock is growth stock =Company A
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1.PE ratio for Company A = 14.29

2. PE ratio for Company B =9.375

3. According to Morningstar classification which Company’s stock is value 
stock = Company B Stock is a Value Stock

4. According to Morningstar classification which Company’s stock is growth 
stock =Company A Stock is a Growth Stock
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Solution Details:

Company A has net income of Rs.560 million; company has 40 million outstanding

shares which are currently trading at Rs.200 per share.

Company B has net income of Rs.480 million; company has 30 million outstanding

shares which are currently trading at Rs.150 per share.

1) What is PE ratio for Company A?

PE = market price per share / earning per share

Earning per share, EPS = net income – dividends on preferred stock

Average outstanding shares

=560 / 40

= 14

PE = 200 / 14 = 14.2857

2) What is PE ratio for Company B?
PE = market price per share / earning per share
Earning per share, EPS = net income – dividends on preferred stock
Average outstanding shares
= 480 / 30
= 16
PE = 150 / 16
= 9.375
3) According to Morningstar classification (based on Magic number) which
Company’s stock is value stock?
4) According to Morningstar classification (based on Magic number) which
Company’s stock is Growth stock?
Company A has Relative PE ratio of 1.1 times and Relative Price to Book ratio of
1.25 times.
If Magic number is > 2.25 then Stock is Growth Stock
If magic Number < 1.75 then Stock is value stock
Magic Number = Relative PE + Relative Price to Book ratio
= 1.1 + 1.25
= 2.35
Magic number > 2.25 so Company A is Growth Stock
Company B has Relative PE ratio of 1 times and Relative Price to Book ratio of 0.50
times.
Magic Number = Relative PE + Relative Price to Book ratio
= 1 + 0.50
= 1.50


Magic number < 1.75 so Company B is Value Stock
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Your answer should be in such format:
1. PE ratio for Company A =14.2857
2. PE ratio for Company B =9.375 
3. According to Morningstar classification which Company’s stock is value stock = Company B
4. According to Morningstar classification which Company’s stock is growth stock =Company A


Solution Details:
Company A has net income of Rs.560 million; company has 40 million outstanding shares which are currently trading at Rs.200 per share. 
Company B has net income of Rs.480 million; company has 30 million outstanding shares which are currently trading at Rs.150 per share. 
1) What is PE ratio for Company A? 
PE = market price per share / earning per share
Earning per share, EPS = net income – dividends on preferred stock 
Average outstanding shares
=560 / 40 
= 14
PE = 200 / 14 = 14.2857
2) What is PE ratio for Company B?
PE = market price per share / earning per share
Earning per share, EPS = net income – dividends on preferred stock 
Average outstanding shares
= 480 / 30 
= 16
PE = 150 / 16
= 9.375
3) According to Morningstar classification (based on Magic number) which Company’s stock is value stock? 
4) According to Morningstar classification (based on Magic number) which Company’s stock is Growth stock? 

Company A has Relative PE ratio of 1.1 times and Relative Price to Book ratio of 1.25 times.
If Magic number is > 2.25 then Stock is Growth Stock
If magic Number < 1.75 then Stock is value stock
Magic Number = Relative PE + Relative Price to Book ratio
= 1.1 + 1.25
= 2.35 
Magic number > 2.25 so Company A is Growth Stock
Company B has Relative PE ratio of 1 times and Relative Price to Book ratio of 0.50 times.
Magic Number = Relative PE + Relative Price to Book ratio
= 1 + 0.50
= 1.50 
Magic number < 1.75 so Company B is Value Stock