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Investment in Stocks and Bonds

Chapter 11, question 1, page 350;
Discuss the difference between the top-down and bottom-up approaches. What is the major assumption that causes the difference in these two approaches?

Problems 1, 2, 4, 5, page 350
1. What is the value to you of a 9 percent coupon bond with a par value of $10,000 that matures in 10 years if you require a 7 percent return? Use semiannual compounding.

2. What would be the value of the bond in Problem 1 if you required an 11 percent rate of return?

4. The Baron Basketball Company (BBC) earned $10 a share last year and paid a dividend of $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assume that you expect to sell the stock for $132 a year from now. If you require 12 percent on this stock, how much would you be willing to pay for it?

5. Given the expected earnings and dividend payments in Problem 4, if you expected a selling price of $110 and required an 8 percent return on this investment, how much would you pay for the BBC stock?

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Chapter 11, question 1, page 350;
Discuss the difference between the top-down and bottom-up approaches. What is the major assumption that causes the difference in these two approaches?

The Top down approach is the E-I-C (Economy-Industry-Company) analysis. In this appraoch, the security analyst first assess the economic conditions, then selects an industry that would best perform in the that economy, and then selects individual firms within that industry that are the best investments.

The Bottom-up approach is the opposite of the Top-down approach. In the Bottom-up approach, the analyst begins with a company, then investigate the industry of that company, and then assesses weather the economy is favoring that industry. The Bottom -Up approach is also sometimes called "Stock Picking" because this analysis starts with a stock.

"Top-down investors believe that picking individual companies is secondary because if the economic conditions are not right for the industryin which a company operates in, then it will be difficult for the company to generates profits, no matter how efficient it is.
Such investors may sometimes miss good companies that are still performing well, even in a depressed economy or industry.

"

"Bottom up investors do extensive research on individual companies as part of the security analysis process. If a company's prospects are strong, the economic, market or industry cycles are of little or no concern. In fact, the bottom up investors often use the downturn in the stock market to buy stocks at depressed levels and wait for these stock to rise in value when the market recovers to notch up big gains.
Thus, bottom up ...

Solution Summary

Calculates the value of stocks and bonds.

$2.19