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An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of ​$9 ​billion, pays a relatively high dividend with little increase in​ earnings, and has a​ P/E ratio of 12. Stock Y has a market capitalization of ​$64 billion but does not currently pay a dividend. Stock Y has a​ P/E ratio of 40. Stock​ Z, a housing industry​ company, has a market capitalization of ​$797 million and a​ P/E of 18. a. Classify these stocks according to their market capitalizations. b. Which of the three would you classify as a growth​ stock? Why? c. Which stock would be most appropriate for an aggressive​ investor? d. Which stock would be most appropriate for someone seeking a combination of safety and​ earnings?

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Answer:

Explanation:

Question a

Stock X is a Mid Cap (Middle Capitalisation) stock which refers to companies with Market Capitalisation that is between $2 - $10 billion.

Stock Y is a LARGE CAP stock which refers to companies with Market Capitalisation that is $10 to $200 billion.

Stock Z is a Small Cap stock which refers to companies with Market Capitalisation of $300 million - $2 billion.

Question b.

A growth stock is usually ascribed to a company that does not pay dividends or pays very little dividends as profits are reinvested to grow the company.

Stock Y does not pay dividends so is probably a Growth Stock.

Question C.

Aggressive Investors tend to put a large proportion of earnings in companies with little or no history of paying dividends. Stock Y would therefore be most appropriate for an Aggressive Investor.

Question D.

Stock X would be most appropriate for someone seeking a combination of safety and earnings. As a Mid Cap stock they would be less aggressive than Small Cap stock and they also pay out high dividends.

If you need any clarification please feel free to react or comment. This would also help other users as well. Thank you.

Answer:

-Stock X: Market capitilazation in billions ($)=9; P/E= 11; Dividend policy= pays high dividend as earning increases.

-Stock Y: Market capitilazation in billions ($) = 64;×P/E= 37; Dividend policy= does not pay high dividend.

-Stock Z: Market capitilazation in billions ($) = 0.799; P/E= 18.

a. X= mid cap, Y= large cap, Z= Small cap.

b. Y is a growth stock

c. Stock Y

d. Stock X

Explanation:

a. In general, mid caps are companies with market capital of $2- 10 billion. Therefore, X is mid capitalization, Y is large capitalization and Z is small capitalization.

b. Y is a growth stock due to the information given. 64 billion dollars market capitilazation without showing dividend means that it is investing in growth projects. There is also an expectation of market to grow further because of the highest P/E among the 3.

c. Stock Y is most appropriate for aggressive investors. Aggressive investors will choose growth stock over value stock.

d. The most appropriate stock for someone seeking combination of safety and earnings is stock X. Reason being that it's paying dividend and has the lowest P/E indicating it is paying least price for the same earning in comparison to other stock.

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