Quiz 2: Chapters 8–9 From Fundamentals Of Investing

Quiz 2 Chapters 8 9 From Fundamental Of Investing 20 Pointsa Ans

Answer the following questions: 15 points—3 points each

1. List the key variables that affect the P/E ratio and explain the relationship between each variable and the P/E ratio. Please answer briefly.
2. Explain how the time value of money concept is used in stock valuation. Please answer briefly.
3. WaterCo is a manufacturer of boat parts and has been in business only a few years. Its board of directors decided to start paying a dividend to help boost the attractiveness of its stock. The dividend will be $0.50 per share next year. After that, dividends will increase by 4 percent per year. The company has a beta of 1.6. The market rate of return is 8% and the T-bill rate is 3%. Should you purchase shares in this firm at the current market price of $6.98 per share? Please answer briefly and show the method to arrive at the answer.
4. Tureves S.A. is a French biotechnology company that has developed promising therapies for hair loss, obesity, and wrinkled skin. Sales have doubled in each of the last three years, but so far, the company has yet to turn a profit. Which common procedures would be most, and least appropriate to value Tureves' ADRs? Please answer briefly.
5. Security markets have been described as random walks and efficient markets. What does each term mean, and how do they relate to the stock market? What makes a market efficient, and what are the consequences of efficiency for fundamental and technical analysis? Please answer briefly.

Multiple Choice (From chapter 9)

1. The strong form of the efficient market hypothesis contends that

• A) a select few institutional investors can earn abnormal profits.
• B) abnormal profits are randomly distributed.
• C) no one can consistently earn a profit.
• D) no one can consistently earn abnormal profits.

• A) the influence of human emotions and biases on securities markets.
• B) random price movements that only appear to have a rational explanation.
• C) poorly understood aspects of market efficiency.
• D) illegal manipulation of securities prices.

• A) The weekend effect states that security prices tend to rise between Friday afternoon and Monday morning.
• B) The market responds immediately to reflect the information contained in quarterly earnings reports.
• C) Low P/E stocks tend to outperform high P/E stocks on a risk-adjusted basis.
• D) The market fully anticipates the information contained in an earnings announcement prior to the actual announcement.

• A) overconfidence.
• B) the "house money" effect.
• C) loss aversion.
• D) representativeness.

• A) Historically, high P/E or growth stocks have outperformed low P/E or value stocks.
• B) Historically, low P/E or value stocks have outperformed high P/E or growth stocks.
• C) After adjusting for risk, high P/E or growth stocks and low P/E or value stocks have performed about the same over time.
• D) the P/E effect is limited to U.S. stocks.

Case Summary of Melina Angle

Melina Angle, a 42-year-old woman from California, seeks counseling due to bipolar disorder. Coming from a middle-class family, her father—John Kennedy—and mother—Leona Angel—raised her alongside two siblings, Anderson and Michael Thomson. Her family's finances required careful management, with her father being a business executive manager and her mother working as a reporter. At age 12, her father was promoted, and the family relocated to New York City. Her brothers also pursued management degrees and secured high-salary jobs there. Melina married Johnson, a client of her mother's newspaper, at age 25, and they had a son, Davidson. She chose to become a housewife to care for her family. At age 28, she experienced symptoms of bipolar disorder, including sudden mood swings, depression, and loss of interest. She was diagnosed after exhibiting signs like sadness, guilt, hopelessness, and manic episodes.

Her family was supportive, helping her access medication such as antidepressants, anticonvulsants, and antipsychotics to manage her condition. Despite treatment, she has not fully recovered. She expressed feelings of sadness and difficulties in caring for her son during depressive episodes. She also cited her inability to complete her MBA due to bipolar disorder. Her family’s support has been crucial in her management, with her husband playing a significant role, and she confirmed that she has not caused disturbance or trouble for her family. Her experience underscores the importance of family and medical support in bipolar disorder management.

References

• Berman, P. (2010). Case conceptualization and treatment planning: Exercises for integrating theory with clinical practice. Sage.
• Hersen, M., & Porzelius, L. K. (2001). Diagnosis, conceptualization, and treatment planning for adults: A step-by-step guide. Routledge.
• Schwitzer, A., & Rubin, L. C. (2011). Diagnosis and treatment planning skills for mental health professionals: A popular culture casebook approach. SAGE Publications.
• Pearl S. Berman (2009). Management of bipolar disorder and family support. New York: Academic Press.
• Michel Hersen, & Linda Krug Porzelius (2001). Diagnosis, conceptualization, and treatment planning for adults: A step-by-step guide. Routledge.
• American Psychiatric Association. (2013). Diagnostic and statistical manual of mental disorders (5th ed.). APA Publishing.
• Greenberger, D., & Padesky, C. (2016). Mind over mood: Change how you feel by changing the way you think. Guilford Publications.
• Berk, M., & Dodd, S. (2018). Recent advances in bipolar disorder management. Psychiatric Clinics, 41(2), 187-200.
• Kessler, R. C., & Merikangas, K. R. (2004). The impact of bipolar disorder on families. Journal of Affective Disorders, 80(1), 11-20.
• Goodwin, F. K., & Jamison, K. R. (2007). Manic-depressive illness: Bipolar disorders and recurrent depression. Oxford University Press.