Case study 5

| February 14, 2018

Case Study for Finance “Fundamentals of Investments”Case 9.2
Several months ago, Deb Forrester received
a substantial sum of money from the estate of her late aunt. Deb initially
placed the money in a savings account because she was not sure what to do with
it. Since then, however, she has taken a course in investments at the local
university. The textbook for the course was, in fact, this one, and the class
just completed this chapter. Excited about what she has learned in class, Deb
has decided that she definitely wants to invest in stocks. But before she does,
she wants to use her newfound knowledge in technical analysis to determine
whether now would be a good time to enter the market.
Deb has decided to use all of the following
measures to help her determine if now is, indeed, a good time to start putting
money into the stock market:
• Advance-decline
line
• New
highs-new lows indicator (Assume the current 10-day moving average is 0 and the
last 10 periods were each 0.)
• Arms
index
• Mutual
fund cash ratio
Deb goes to the Internet and, after
considerable effort, is able to put together the accompa- nying table of data.

Questions
a. Based
on the data presented in the table, calculate a value (where appropriate) for
periods 1 through 5, for each of the 4 measures listed above. Chart your
results, where applicable.
b. Discuss
each measure individually and note what it indicates for the market, as it now
stands. Taken collectively, what do these 4 measures indicate about the current
state of the market? According to these measures, is this a good time for Deb
to consider getting into the market, or should she wait a while? Explain.
c. Comment
on the time periods used in the table, which are not defined here. What if they
were relatively long intervals of time? What if they were relatively short?
Explain how the length of the time periods can affect the measures.

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Case 10.2
It’s probably safe to say that there’s
nothing more important in determining a bond’s rating than the underlying
financial condition and operating results of the company issuing the bond. Just
as financial ratios can be used in the analysis of common stocks, they can also
be used in the anal- ysis of bonds—a process we refer to as credit analysis. In
credit analysis, attention is directed toward the basic liquidity and
profitability of the firm, the extent to which the firm employs debt, and the
ability of the firm to service its debt.
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The financial ratios shown above are often
helpful in carrying out such analysis. The first 2 ratios measure the liquidity
of the firm, the next 2 its profitability, the following 2 the debt load, and
the final 2 the ability of the firm to service its debt load. (For ratio 5, the
lower the ratio, the better. For all the others, the higher the ratio, and the
better.) The table lists each of these ratios for 6 companies.
Questions
a. Three
of these companies have bonds that carry investment-grade ratings. The other 3
com- panies carry junk-bond ratings. Judging by the information in the table,
which 3 companies have the investment-grade bonds and which 3 have the junk
bonds? Briefly explain your selections.
b. One
of these 6 companies is an AAA-rated firm and one is B-rated. Identify those
companies. Briefly explain your selections.
c. Of
the remaining 4 companies, 1 carries an AA rating, 1 carries an A rating, and 2
have BB ratings. Which companies are they?

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