Question 1
Assignment 3: Value and Growth Screens Value Screens Value investing is a disciplined investment approach using valuation measures that help to avoid the emotional traps of the market. Stocks and markets are driven by emotions that often push prices from their intrinsic value. The value strategies seek to profit from other investors' misjudgments by seeking stocks that are out-of-favor or neglected by the market and by avoiding the high-flying fashionable stocks that have been swept up by market euphoria. Eventually the market rediscovers out-of-favor stocks and lets the high-fliers fall back to earth. This is why value investing is sometimes called contrarian investing. Value investing selects stocks that are priced low relative to measures of worth, such as sales, earnings, operating cash flow, assets and equity. Common measures of value include low price-earnings, price-sales, low price-to-operating cash flow, low price-to-book ratios and high dividend yields. This is not to say that all firms with lower price-X ratios or high dividend yields are good values. To be a good value, they must be able to show some potential. Realize that many stocks with low price-X ratios have little potential and deserve their low multiples! Free cash flow to the firm (FCFF) was used as input to stock valuation in Assignment 2. With strong free cash flow, debt can be retired, new products developed, stock can be repurchased, and dividend payments can be increased. Excess free cash flow also makes a company a more attractive takeover target. A screen for positive and consistent free cash flow is a good starting point for the investor scanning for value firms on a cash flow basis. If including a free cash flow screening criteria, it is a good idea to look only at firms with a market cap greater than or equal to 50 million. This restriction excludes small stocks with poor trading liquidity. In addition, you should not apply any FCFF screening criteria to financial firms. Financial firms do not typically have large expenditures in brick and mortar property, plant, and equipment expenditures. However, they make significant investments in marketable securities, which are not considered in the standard free cash flow calculation. When looking at the cash flow of a financial firm it would be best to examine total cash flow figures from the statement of cash flows. As a general rule of thumb, screens that focus primarily on value stocks tend to produce a set of stock that can show less price volatility than screens that focus on pure growth stocks. Further, value stocks tend to have less portfolio turnover. Typically, they do not invest in smaller firms, preferring to focus on companies that are more mature and mid-sized or larger in terms of market capitalization. Historical earnings growth rates are rarely much above the market average, and the prices of the selected stocks do not tend to have momentum relative to the market. Value approaches tend to outperform other approaches during bear markets, but they can fall behind during bull markets, particularly during the strongest portion. However, as with all screens, a study of the annual report and an understanding of the company, its products, and its industry are required. Q1. Use the list of characteristics of value stocks that are shown in Table 1 along with those from the various AAII Value Stock Screen articles shown in Table 2 and from the Free Cash Flow Value Screen in Table 3 to create YOUR OWN value screen using either the Yahoo Finance or the AAII Stock Investor Pro screener. Keep it simple and use no more than five (5) to ten (10) screening criteria for this assignment. As a general rule, the more criteria you specify and the stronger (the more limiting) your criteria, the smaller will be your sample of stocks that pass your screen. i) LIST the five (5) to ten (10) value criteria you have selected for your screen and EXPLAIN your screening criteria choices. ii) LIST the total number, not names, of firms that your screen generates. iii) Based on what you have learned in the course to date, SELECT what you believe to be the best three (3) to five (5) firms from your list for immediate investment and JUSTIFY your selection. As with all screens, a study of the annual report and an understanding of the company, its products, and its industry are required. Table 1: Common Criteria for Value Stocks Ample cash as a current asset (cash > 10% of market cap) Ample cash flow to fund necessary investment (net income > capital spending) Conservative dividend payout policy (dividend < 50% of EPS) Conservative financial structure (debt/equity < 1.0 ) Conservative issuance of common stock to managers and other employees (constant or falling number of shares outstanding). Low price-book ratio relative to the market (P/B < 75% of S&P 500 or DOW). Low price-cash flow ratio relative to the market (P/CF < 75% of S&P 500 or DOW). Low price-earnings ratio relative to the market (P/E 150% of S&P 500 average) Table 2: Criteria for Value Stocks from Various AAII Screens Strategy P/E Ratio (X) Price- to-Book Value Ratio (X) Price- to-Sales Ratio (X) P/E to EPS Est. Growth (X) Hist. EPS Growth (%) Est. Long -Term EPS Growth (%) Market Cap ($ Mil) 52-Week Relative Strength (%) Value Cash Rich Firms 18.5 1.5 1.8 1.5 22.5 14.6 528.8 10.0 David Dreman 16.9 1.9 1.0 2.2 4.2 5.9 94,110.7 -18.0 David Dreman With Est Revisions 12.5 1.7 1.0 1.2 18.3 10.1 6537.8 14.5 Dividend Screen?DRPs 13.1 2.0 1.5 1.6 11.8 8.8 9,930.0 -13.5 Dividend Screen?Non-DRPs 11.1 1.2 1.0 1.5 5.5 11.8 184.8 -15.5 High Relative Dividend Yield 17.1 1.9 1.8 1.5 11.9 10.0 3,146.6 -14.0 Dogs of the Dow 16.1 2.2 1.1 2.6 14.8 5.7 80,747.6 -16.5 Dogs of the Dow--Low Priced 5 1.3 1.9 1.0 2.2 4.2 5.9 94,110.7 -18.0 Low Price-to-Free-Cash-Flow 11.9 1.0 0.4 1.3 -25.5 10.4 302.8 5.5 Fundamental Rule of Thumb 5.1 2.6 1.6 1.0 20.3 16.0 334.7 0.0 Graham?Defensive Investor (Non-Utility) 15.3 1.8 1.1 1.5 15.4 10.6 2,440.5 3.0 Graham?Enterprising Investor 6.2 1.0 0.3 0.0 17.7 -3.9 348.4 22.0 Josef Lakonishok 18.7 2.0 1.2 1.6 14.1 10.7 2187.0 13.0 John Neff 9.1 1.2 1.2 0.8 27.2 14.2 395.9 -23.0 O'Shaughnessy?Value 15.4 2.0 1.0 3.0 4.5 4.6 19,517.3 0.0 Joseph Piotroski 27.6 0.7 1.6 0.0 -8.0 0.0 27.2 143.0 P/E Relative 15.0 2.9 1.4 1.4 17.8 10.7 3032.4 7.0 Schloss 7.1 0.5 1.0 19.2 -26.0 10.0 9.2 -37.0 Weiss Blue Chip Div. Yield 16.0 3.1 1.2 1.6 17.0 11.1 7,196.0 0. Table 3: Free Cash Flow Screen Market cap greater than or equal to 50 million Exclude financial firms Positive free cash flow for each of the last five fiscal years Positive free cash flow for the most recent 12 months Price-to-free-cash-flow ratio below their industry price-to-free-cash-flow ratio median Price-to-free-cash-flow ratio below the company's own five year average Growth Screens Growth investing is concerned with selecting stocks that will exhibit above-average and increasing growth. Growth investors look for industries and companies that are in the aggressive growth and growth stages of their life cycle?a period associated with rapid and increasing growth rates in sales and earnings with still-reasonable profit margins. Minimally, growth companies are growing above the rate of the overall economy. Practically speaking, however, the benchmark for being classified as a growth stock is a 15% to 20% annual growth rate in earnings per share. Unless you are looking at a cyclical company coming out of a slump, growth rates this high generally require capital spending to maintain expansion. Growth stocks will therefore retain most of their earnings and have low dividend yields. Investors looking for high-dividend-yielding stocks will generally look for firms late in the growth stage or in the mature stage. One weakness with growth stocks, especially those in the aggressive growth stages, is that internal cash flow may not be able to support growth and, thus, more capital by issuing additional shares will be required. These firms will normally generate a negative FCFF. This may have the effect of diluting the existing ownership of shareholders. Stocks with high growth and good prospects attract a great deal of attention. Price tends to be bid up with high anticipation. High expectations relative to current levels of earnings lead to high price-earnings, P/E, ratios along with high P/S and P/BV ratios. It is not uncommon to see highly touted growth stocks with price-earnings multiples two to four times the market. As long as a firm maintains its earnings per share momentum and exceeds the growth expectations of the market, its stock price can be expected to increase tremendously. Growth stocks, however, tend to be volatile. A small deviation from market expectations during a quarterly earnings announcement can send the price flying in either direction. Institutional investors own a large percentage of growth stocks and when they all try to head for the exit door the price can tumble. Growth strategies want to buy growth, period. Their focus is on companies that are rapidly expanding their sales and earnings. Often, these stocks are already on the move, with prices typically moving up faster than the market. The approach tends to be more volatile-prices can move up or down substantially, with small changes in expectations-and it tends to perform better on a relative basis late in the bull market or when the economy is slightly down. For these reasons, investing in growth stocks requires close monitoring. Q2. Use the list of characteristics of growth stocks that can be found in Table 4 along with those from the various AAII Growth Stock Screens shown in Table 5 to create YOUR OWN growth screen using the Yahoo Finance or the AAII Stock Investor Pro Screener. Keep it simple and use no more than five (5) to ten (10) screening criteria for this assignment. i) LIST the five (5) to ten (10) growth criteria you have selected for your screen and EXPLAIN your choices. ii) LIST the number of firms that your screen generates. iii) Based on what you have learned so far in the course, SELECT what you believe to be the best three (3) to five (5) firms from your list for immediate investment and JUSTIFY your selection. As with all screens, a study of the annual report and an understanding of the company, its products, and its industry are required. Table 4: Common Criteria for Growth Stocks Growth stocks display high profit margins. Growth stocks display an attractive return on total assets (ROA). Growth stocks display low debt ratios. Growth stocks lack cutthroat competition. Growth stocks have superior research. Growth stocks have low overall labor costs. Growth stocks pay high wages. Growth stocks are immune from regulation. Table 5: Criteria for Growth Stocks from Various AAII Screens Strategy P/E Ratio (X) Price- to-Book Value Ratio (X) Price- to-Sales Ratio (X) P/E to EPS Est. Growth (X) Hist. EPS Growth (%) Est. Long -Term EPS Growth (%) Market Cap ($ Mil) 52-Week Relative Strength (%) Growth Richard Driehaus 18.5 3.6 3.6 1.9 8.0 27.5 704.0 69.0 Foolish Small Cap 8 15.8 3.6 4.5 1.4 47.3 29.5 440.3 276.5 Kirkpatrick Growth 47.1 2.4 3.4 2.2 -18.2 10.0 3,467.9 99.0 IBD Stable 70 20.7 4.0 2.2 1.0 39.1 18.8 1,168.7 37.0 Inve$tWare Quality Growth 20.4 5.3 3.4 1.1 32.4 16.9 3,261.2 -3.5 O'Neil's CAN SLIM 11.2 3.5 3.4 0.0 47.3 0.0 367.8 687.0 O'Neil's CAN SLIM Revised 3rd Edition 31.6 7.2 4.4 1.7 47.3 24.8 1242.2 447.0 Return on Equity 20.1 4.8 2.2 1.4 32.3 15.8 836.2 10.0 Additional AAII Growth Screen Criteria: Growth in earnings per share from continuing operations over the last five years must be 25% or more The year-to-year growth rate in earnings per share from continuing operations has increased over each of the last four fiscal years (Y4 to Y3, Y3 to Y2, etc.) Growth in earnings per share from continuing operations over the last 12 months has been positive At least three analysts have provided earnings estimates for the current fiscal quarter (Q0) The percentage change in stock price over the last four weeks is positive The 26-week relative price strength is greater than or equal to the industry's 26-week relative price strength The market capitalization for the latest fiscal quarter (Q1) is greater than $50 million and less than $3 billion Those companies that trade as American Depository Receipts (ADRs) are excluded The current stock price must be within 10% of its 52-week high The 52-week relative strength must be in the top 30% of the entire database (percent rank greater than 70) Return on equity for the last 12 months and for each of the last five fiscal years is greater than 1.5 times the industry median return on equity for the same periods The net margin for the last 12 months is greater than the industry's median net margin for the same period The total liabilities to total assets ratio for the last fiscal quarter (Q1) is less than the industry's median total liabilities to total assets ratio for the same period The asset turnover for the last 12 months is greater than the industry's median asset turnover for the same period
Question 2
1. Which of the following statements is CORRECT? a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings. b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. Forecasting concepts c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management?s historical performance is evaluated. d. The capital intensity ratio gives us an idea of the physical condition of the firm?s fixed assets. e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists. 2. Which of the following statements is CORRECT? a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero. AFN equation b. If a firm?s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm?s AFN to be negative. c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm?s actual AFN must, mathematically, exceed the previously calculated AFN. d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. e. Dividend policy does not affect the requirement for external funds based on the AFN equation. 3. Which of the following statements is CORRECT? a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner. b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow. c. Firms whose fixed assets are ?lumpy? frequently have excess capacity, and this should be accounted for in the financial forecasting process. Forecasting financial reqs. d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. e. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.,I just want clarification and I think # 1 b is correct, #2 a is correct and #3 is c correct If you agree with me could you explain to me why those answers are correct. Thanks
Question 3
The following figure applies to Questions 23-27 23. Based on the systems flowchart above: (SEE ATTACHMENT) a. The company uses general ledger software manual for journal entries. b. The company's cash payments process has strong separation of duties. c. Duties are appropriately separated between the mailroom, cash receipts and accounting. d. The company makes daily cash deposits. 24. Which of the following problems is evident in the systems flowchart above? a. The cash receipts department should not be preparing bank deposits. b. The accounting department should use the customer check to prepare journal entries. c. Customer checks are not endorsed prior to deposit. d. The company does not make bank deposits often enough. 25. Which of the following journal entries would the accounting department make based on the systems flowchart above? a. Debit cash, credit accounts receivable. b. Debit accounts receivable, credit cash. c. Debit cash, credit inventory. d. The accounting department should not make an entry. 26. Which of the following is missing from the flowchart: (i) a computerized endorsement process, (ii) a terminator symbol? a. i only. b. ii only. c. Both i and ii. d. Neither i nor ii. ? 27. Who would prepare the "remittance advice" in the flowchart above? a. The customer. b. The mailroom. c. The accounting department. d. The bank.
Question 4
Personal Beauty Care, LLC is a personal ?Beauty? and grooming service company with the aim of serving its clients in view of optimal individual convenience provision. The company?s business service model is a ?mobile? one allowing its employees to reach out to the customers rather than having them visit a salon for the offered services. The business intends to operate six days a week, Monday through Saturday and occasionally Sundays too. The primary target business location will be the Adult Day Care centers in the Franklin Township Community, New Jersey. The company plans to serve specifically three of the senior citizen facilities working through contracts with the respective administration. Also, the company intends to schedule service professionals? visitation to these centers for duration of six hours (9:00 AM ? 3:00 PM), on three alternate weekdays i.e. Monday, Wednesday and Friday. While in the evenings, the home-visit services will be managed according to appointments only for four hours duration between 3:00 PM and 7:00 PM on each of the previously mentioned weekdays. For the remaining three weekdays, i.e. Tuesday, Thursday and Saturday the business will be operational through the day (9:00AM- 7:00PM), specifically working by appointment and making individualized customer home visits. The respective scheduling details for our management team as well as service professionals include: i. Monday, Wednesday and Fri day ? Center Service: a.) Two full-time cosmetologists will go to the centers 9PM - 3PM, which is 6hrs./day * 3 days =18hours; [1 hour lunch (unpaid)] b.) Two part-time cosmetologists for home visits, 3PM - 7PM, which is 4 hrs. /day * 3 days= 12 hours. ii. Tuesday, Thursday, Saturday ? Home Service: a.) Two Full-time cosmetologists for home visits, 9AM - 3pm, which is 6hrs./day * 3 days 18 hours; [1 hour lunch for both shifts (unpaid)] b.) Two part-time cosmetologist for home visits 3PM to 7PM which is 4 hrs. /day * 3 days =12 hours. c.) Plan and cost your people requirements a. Full-Time Cosmetologist (2) i. 40 Hours ii. Annual Salary = $26,000 I.e.$12.50 hourly wage X 40 hour work week X 52 weeks in the year b. Part-Time Cosmetologist (2) i. 20 hours or less ii. Hourly Wage = $12.50 (bls.gov website) c. Floater Cosmetologist (1) i. Per diem = ?per day? or ?for each day? ii. Hourly Wage = $15.00 1. (12.50 hourly wage X 8 hours per day X 6 day work week) / 40 hour regular work week a. (12.50 X 8 X 6) / 40 = $15 iii. Need to emphasize that this employee is only covering for our regular employees if anyone calls out or goes on vacation. iv. Since the floater will not be OUR OFFICICAL employee, they get paid more for providing their services on an ?AS NEEDED? basis d. Drivers (1) i. $10/HR = 40 hours a week e. Office Assistant i. Full-Time = 40 hours a week ii. Hourly Wage = $11/HR Our business office set-up being primarily a ?virtual? one, by default saves many of the start-up facilities and equipment costs. You are having 300,000 dollars for investment in this business. Prepare an Financial plan and state how Computer Equipment Insurance Sales and Marketing Attorney Fees Initial Inventory Salary (owners) Salary (employees) Fixed Expenses (Sockets, Registration fees, taxes ) Miscellaneous Cash on hand can be allocated and managed. Also please explain the break even points analysis and the quarterly fund allocation with calculations.
Question 5
E8-2 The Pension Trust Fund maintained by the City of Linden had the following transactions during 2012. Record each transaction in the Pension Trust Fund. Ignore any other funds that may be involved in a transaction. 1. Contributions of $600,000 were received from General Fund employees, and the General Fund contributed its share of $100,000. 2. The fund paid $500 for investment management fees. 3. Investments held by the fund increased in value by $3,500. 4. Depreciation on fund capital assets totaled $800. 5. Retirement benefits of $7,700 were paid to retirees. 6. Interest of $2,500 and dividends of $1,400 were received from investments. E8-4 Prepare the journal entries to record the following transactions in an Investment Trust Fund for Seggen County during the calendar year 2013. 1. Turtle Creek and Pineview contributed $60,000 and $40,000, respectively, to an Investment Trust Fund operated by Seggen County during 2013. 2. Investments totaling $75,000 were purchased. 3. Income from the investments during the year totaled $8,000. 4. The fund paid $1,500 to the county for investment management fees. 5. The investments increased in value by $3,000. 6. Income of $10,000 was paid to the two cities, based on the relative amount of their initial investment. P8-2 The following information is available for Russellville at June 30, 2012. Prepare a statement of fiduciary net position for Russellville?s Pension Trust Fund as of June 30, 2012, by reporting the assets ?and liabilities from the information provided. ? Additions?interest $ 250,000 ? Member contributions 340,000 ?Loss on sale of investments 30,000 ? Cash 180,000 ? Accrued expenses 56,000 ? Interest receivable 20,000 ? Accounts payable 33,000 ? Due to other funds 54,000 ? Investments 10,000,000 ? Deductions?operating costs 42,000 ? Retirement annuities paid 987,000
