Reading the STOCK Table – Calculations for Exam 3

 

Let’s look at the McDonald’s stock that is highlighted in Figure 7.3, pg. 287.  I want you to be able to determine or calculate 5 items related to the stock quote table.

 

  1. Value Indicator #1:  Where is the stock price relative to its 52 WEEKS HI and LO?

    McDonald’s current stock price is listed under the LAST column:  $25.79.  Note that this price is closer to the 52 WEEKS HI than to the 52 WEEKS LO.  However, if the current stock price dropped to $20, we might conclude that it is an attractive buy (“relatively undervalued”) since it has more upside potential than downside potential (assuming, of course, that next year will be like the past 52 weeks).

  2. Value Indicator #2:  Dividend Yield

    Dividend Yield =           Annual Dividend / Market Price
                            =          $0.40   /    $25.79
                            =          0.0155 or 1.55% or 1.6%
     
    So, McDonald’s investors will get a yearly dividend yield of about 1.6% if they buy the stock today and hold a year.  Note:  The f next to .40 is footnoted as “annual rate, increased on latest declaration.”  In the listing, each stock’s annual dividend is the most recent quarter’s dividend multiplied by 4.  Question:  Why would any risk-averse investor settle for less than 2% as a dividend yield when s/he can buy T-bills yielding more than 2%?
    Use:  This can be compared to Certificate of Deposit rates at their bank, bond yields, or dividend yields of other similar stocks.

  3. Value Indicator #3:  PE Ratio

    Recall from Chapter 2 that the PE (or P/E) ratio is an indicator of investor confidence in a stock.  It is higher the higher the projected growth in earnings and cash flows, and the more consistent those earnings or cash flows are.  The PE ratio is based on the most recent annual EPS.  If I know the P/E ratio (given in fourth column from the right) and the current stock price (under CLOSE column, second column from the right), I can calculate the most recent fiscal year’s EPS:

    EPS     =  Current Stock Price  /  PE Ratio
                =  $25.79 / 20
                =  $1.29

 

As a value indicator, however, I would compare the PE ratio to the PE ratio of peer competitors, the industry average PE ratio, and the PE ratio for the overall market (usually measured by the S&P 500 PE ratio).  Illustrating, if Ford’s PE is 15 and GM’s PE is 20, investors are showing less confidence in Ford’s outlook.  Value-oriented investors, some of whom may believe that Ford’s recent problems are meeting with investor overreaction (overly negative evaluation by existing investors), may decide to buy the stock with the anticipation it will increase in price until its PE is 20 (just like GM’s).


  1. VOL 100s is the number of shares that were bought and sold, in this case on May 18, 2004.  To get the individual numbers of shares traded, move your decimal point two places to the right.  For McDonald’s, 35174 becomes 3,517,400 shares.


  2. NET CHG is the dollar change in price from the previous day’s close price to today’s close price.  McDonald’s had a -0.08 drop in that day.  Since the quote in the table is for May 18, what is May 17’s close price (assuming that the 18th is not a Monday)?


NET CHG = Close Price – Previous Day’s Close Price


-0.08 = 25.79 – X


Adding X to both sides, and adding 0.08 to both sides, we get::

X = 25.87


Logic:  the stock price decreased in price.  It had to be at a higher price the previous day, then.

 

This change in price represents a 3/10 of 1% price drop [(25.79 – 25.87)  /  25.87].