Christine Norton-Hines is a young Hollywood writer who is well on her way to television superstardom. After writing several successful television specials, she was recently named the head writer for one of TV's top-rated sitcoms. Christine fully realizes that her business is a fickle one and, on the advice of her dad and manager, has decided to set up an investment program. Christine will earn about a half-million dollars this year. Because of her age, income level, and desire to get as big a bang as possible from her investment dollars, she has decided to invest in speculative, high- growth stocks. Christine is currently working with a respected Beverly Hills broker and is in the process of building up a diversified portfolio of speculative stocks. The broker recently sent her information on a hot new issue. She advised Christine to study the numbers and, if she likes them, to buy as many as 1,000 shares of the stock. Among other things, corporate sales for the next 3 years have been forecasted as follows: Year 1 2 3 Sales ($ in millions) 22.5 35.0 50.0 The firm has 2.5 million shares of common stock outstanding. They are currently being traded at $70 a share and pay no dividends. The company has a net profit rate of 20%, and its stock has been trading at a P/E of around 40 times earnings. All these operating characteristics are expected to hold in the future.
Christine Norton-Hines is a young Hollywood writer who is well on her way to television superstardom. After writing several successful television specials, she was recently named the head writer for one of TV's top-rated sitcoms. Christine fully realizes that her business is a fickle one and, on the advice of her dad and manager, has decided to set up an investment program. Christine will earn about a half-million dollars this year. Because of her age, income level, and desire to get as big a bang as possible from her investment dollars, she has decided to invest in speculative, high- growth stocks. Christine is currently working with a respected Beverly Hills broker and is in the process of building up a diversified portfolio of speculative stocks. The broker recently sent her information on a hot new issue. She advised Christine to study the numbers and, if she likes them, to buy as many as 1,000 shares of the stock. Among other things, corporate sales for the next 3 years have been forecasted as follows: Year 1 2 3 Sales ($ in millions) 22.5 35.0 50.0 The firm has 2.5 million shares of common stock outstanding. They are currently being traded at $70 a share and pay no dividends. The company has a net profit rate of 20%, and its stock has been trading at a P/E of around 40 times earnings. All these operating characteristics are expected to hold in the future.
Chapter15: Mutual And Exchange Traded Funds
Section: Chapter Questions
Problem 3FPC
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Question
1. Assuming that all expectations hold up and that Christine buys the stock at $70, determine her expected
2. What risks is she facing by buying this stock? Be specific
3. Should she consider the stock a worthwhile investment candidate? Explain
4. What do you think of her investment program? What do you see as its strengths and weaknesses?
5. Are they any suggestions you would make?
6. Do you think Christine should consider adding foreign stocks to her portfolio? Explain
Transcribed Image Text:Chrisine Looks for a Way to Invest Her Newfound Wealth
Christine Norton-Hines is a young Hollywood writer who is well on her way to television
superstardom. After writing several successful television specials, she was recently named the
head writer for one of TV's top- rated sitcoms. Christine fully realizes that her business is a
fickle one and, on the advice of her dad and manager, has decided to set up an investment
program. Christine will earn about a half-million dollars this year. Because of her age, income
level, and desire to get as big a bang as possible from her investment dollars, she has decided to
invest in speculative, high- growth stocks.
Christine is currently working with a respected Beverly Hills broker and is in the process of
building up a diversified portfolio of speculative stocks. The broker recently sent her information
on a hot new issue. She advised Christine to study the numbers and, if she likes them, to buy as
many as 1,000 shares of the stock. Among other things, corporate sales for the next 3 years have
been forecasted as follows:
Year
Sales ($ in millions)
1
22.5
35.0
3
50.0
The firm has 2.5 million shares of common stock outstanding. They are currently being traded at
$70 a share and pay no dividends. The company has a net profit rate of 20%, and its stock has
been trading at a P/E of around 40 times earnings. All these operating characteristics are
expected to hold in the future.
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