An investor is considering purchasing one of the following three stocks. Stock X

Question

An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of $7 billion, pays a relatively high dividend with little increase in earnings, and has a P/E ratio of 12. Stock Y has a market capitalization of $62 billion but does not currently pay a dividend. Stock Y has a P/E ratio of 37 Stock Z, a housing industry company, has a market capitalization of $804 million and a P/E of 18

.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?

Question - Stock X is classified as a:

a. small-cap

b. mid-cap

c. large-cap

Explanation / Answer

OBJECTIVE OF THE COMPANY IS TOMAXIMISE SHAREHOLDERS WEALTH= MARKET CAPITALIZATION

market capitalization = price per share*no. of share

price per share = P/E RATIO* EARNING PER SHARE

price per share*no. of share = P/E RATIO* EARNING PER SHARE*no.of share

Market capitaization = P/E RATIO* total earning

hence marketcap is directly proportionate of p/e ratio and earning

higher the p/e ration and earning higher the cap will be produced

where P/E ratio = price/Earning per share

i.e. p/e ratio is the multiple of EPS

for example : for stock X , stock X is trading 12 times its eps

   stock y is trading 37 times of its Eps

A) MID-LARGE-SMALL

b) higher the p/e ratio , higher will be the growth , since company is not paying dividend it means company has business opportunities which needs funds and company is locking its dividend so that it can invest and to earn more. hence Y is a growth stock

c) for an aggressive investor, he will be ready to take risk and will not mind if he s not recvng dividend currently so Ywill be most suitable since it has higher p/e ratio and larget cap.

d) since X has the p/e ratio of 12 and it is also paying higher dividend and also MID CAP companies are considered relatively safe, so safety feature is locked in this type of stock

he's getting dividend as well as a decent p/e ratio, hence x will be suitable

Question= x is a MID cap stock

cap = wealth

STOCK MARKET CAPITALIZATION P/E RATIO DIVIDEND MARKET CAP X $7 BILLION 12 HIGH MIDCAP Y $62 BILLION 37 NO LARGE CAP Z $0.804 BILLION 18 NO SMALL CAP

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