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Investment Decision - An Interpreptation of Available Data

For your convenience, I have attached an APA formatted MS Word file containing a case file involving the decison facing the Betty Black investment club, an organization that must make a decision to buy the stock of either New Soft Inc. or Capital Corp.

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For your convenience, I have attached an APA formatted MS Word file containing the text below. I have also attached reference sources which may help in increasing understanding of the subject material.

3. Betty Black investment club wants to buy the stock of either New Soft Inc. or Capital Corp. In this connection, Black has prepared the following table. You have been asked to help her interpret the data, based on your forecast for a healthy economy and a strong market over the next 12 months.

New Soft Inc. Capital Corp. S&P 500 Index
Current Price $30 $32 n/a
Industry Computer Software Capital Goods n/a
P/E ratio (current) 25x 14x 16x
P/E ratio (5-yr avg) 27x 16x 16x
P/B ratio (current) 10x 3x 3x
P/B ratio (5-yr avg) 12x 4x 2x
Beta 1.5 1.1 1.0
Dividend Yield 0.3% 2.7% 2.8%

New Soft's shares have higher price/earnings (P/E) and price/book (P/B) ratios than those of Capital corp. Identify and briefly discuss three reasons why the disparity in ratios may not indicate that New Soft's shares are overvalued relative to the shares of Capital corp. Answer the question in terms of the two ratios, and assume that there have been no extraordinary events affecting either company.

Price-to-earnings is one of the most widely used ratios, ...

Solution Summary

For your convenience, I have attached an APA formatted MS Word file containing a case file involving the decison facing the Betty Black investment club, an organization that must make a decision to buy the stock of either New Soft Inc. or Capital Corp.

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