Investment Selection Given that Madrigal Pharmaceuticals was up by about 516 percent for 2017, why didn’t all investors hold Madrigal?
To discuss: The reason for not holding stocks of Company M even after knowing that Company M was up by 516 percent in 2017.
Introduction: Investors can earn returns from any investment in stocks in two forms, i.e., by capital gains due to an increase in stock value in the market or by dividends distributed by the company at a specified time period.
Answer to Problem 1CQ
The reason could be high-risk involvement due to high volatility.
Explanation of Solution
Given Information: Company M was up by 516 percent in 2017 and Company S was also up by 438 percent of gains. But there were some companies whose share prices dropped.
Investors can invest in any stock depending on the company’s previous performance along with the potential of earning returns and the risk associated with the investment. When company M’s shares were up by 516 percent in 2017 many investors were happy but many people would have wished to invest in Company M at that time. But even after knowing that share was up in 2017 many investors do not hold shares of company M due to high-risk involvement. The increase of 516 percent shows that the volatility of the stock price is high. Investors holding shares of Company M may bear huge profits but it is also likely that investors of Company M may incur huge losses in the future.
Therefore, not all investors are ready to take high risks.
Want to see more full solutions like this?
Chapter 10 Solutions
CORPORATE FINANCE - CONNECT ACCESS
- Case Study Questions What was the total postpaid revenue in 2017? What was the total net profit in 2017? Identify examples of strategies adopted by MAXIS in that year. How were the above strategies related to their Customer Relationship Management (CRM) and future sale?arrow_forwardUse Apple’s financial statements to calculate the following ratios and summary measures for fiscal 2020 and 2019 (round to the nearest tenth). Indicate whether the ratio was more favorable in 2020 or 2019. Apple’s stock price was $115 per share on Sept. 30, 2020 and $55 on Sept. 30, 2019. Fiscal 2020 Fiscal 2019 Is the Ratio more favorable in 2020 or 2019? Return on Assetsarrow_forwardc. Using DuPont framework, compute Bersatu Berhad’s returns on equity for 2020 and 2021? Show all formulas and calculations.d. Is there any significant change in the returns on equity over the two years? What conclusion can you arrive with regards to thefactors influencing the returns on equityarrow_forward
- Calculate the following ratios for 2021. Express answers to two decimal places. 4.1.1 Gross margin 4.1.2 Inventory turnover 4.1.3 Acid test ratio 4.1.4 Debt to equity 4.1.5 Earnings per share 4.2 Are the collections from credit sales satisfactory? Motivate your answer by using the relevant ratio. 4.3 Would the shareholders of Harmony Limited be satisfied with the return on their investments? Motivate your answer with the use of a relevant ratio. 4.4 Suggest THREE (3) ways in which Harmony Limited can improve its gross margin ratio, without increasing the selling price of the inventories.arrow_forwardProfitability and Asset Management Ratios You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2018: net income = $600,000, total debt = $13.0 million, debt ratio = 40%. What is Tikki's ROE for 2018?arrow_forwardYou are preparing pro forma financial statements for 2017 using the percent-of-sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2017?arrow_forward
- Orlando Medical’s quick (acid-test) ratio at year-end 2018 is closest toa. 0.68.b. $8,578 million.c. 0.45.d. 0.75.arrow_forwardFor this question, use the American Eagle Outfitters 2016 10Ks and 2017 Q1 10Q from the previous questions. Your Managing Director asks you to include valuations based on Comparable Forward PE multiples given that peer capital structures have been relatively similar. She asks you to assume a 14x PE multiple on forward diluted EPS, and a 10% growth rate over LTM diluted EPS to calculate forward EPS, which is being assumed by industry analysts. Using the aforementioned assumptions for Comparable Transactions’ PE multiples, what is the implied AEO share price based on the latest data provided to you from its Corporate filings as of June 2017? 15.12 16.63 16.79 17.86arrow_forwardProfitability and Asset Management Ratios You are thinking of investing in Nikki T's, Inc. You have only the following information on the firm at year-end 2015: net income is $250,000, total debt is $2.5 million, and debt ratio is 55 percent. What is Nikki T's ROE for 2015?arrow_forward
- Suppose a firm has had the historical sales figures shown as follows. What would be the forecast for next year's sales using the average approach? Year 2017 2018 Sales $ 750,000 500,000 Multiple Choice O $695,000 $700,000 $750,000 $775.000 2019 $ 700,000 2020 $ 750,000 2021 $ 775,000arrow_forwardCompare the year end price of Dollar Inc. and Target Corp. As an investor, what would these two charts tell you, and who would you choose to invest in and why?arrow_forwardCalculate ROI for 2017. Calculate ROE for 2017. Calculate working capital at July 30, 2017, and July 31, 2016. Calculate current ratio at July 30, 2017, and July 31, 2016. Calculate Acid-test ratio at July 30, 2017, and July 31, 2016.arrow_forward
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage LearningPFIN (with PFIN Online, 1 term (6 months) Printed...FinanceISBN:9781337117005Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning