Business
Business, 06.05.2020 01:01, esmelopez1015

Pete and​ Jessica, on the advice of their​ next-door neighbor, recently purchased 600 shares of a​ small-capitalization Internet​ stock, trading at $ 78.91 per share. Their neighbor told them that the stock was a​ "real money​ maker" because it recently had a​ two-for-one stock split and would probably split again soon. Even​ better, according to the​ neighbor, the company was expected to earn $ 1.49 per share and pay a $0.27 dividend next year. Pete and Jessica have so far been less than impressed with the​ stock's performancelong dash —the stock has underperformed the​ S&P 500 Index this year. Pete and Jessica have come to you for some independent advice.

Required:
a. Assuming that the stock actually splits two for​ one, how many shares will Pete and Jessica​ own? What will be the market value of their stock after the​ split? How will the split affect the value of their​ holdings? Was their neighbor correct in thinking that the stock split made the stock a​ "real money​ maker"?
b. Using the information​ provided, calculate the​ stock's P/E ratio. Would you classify this investment as a growth or value​ stock?
c. Since​ Pete, in​ particular, is worried about the price of the​ stock, explain to him how and why corporate earnings are so important in the valuation of common stocks.
d. Should Pete and Jessica be using the​ S&P 500 Index as a benchmark for this​ stock? Why or why​ not? What benchmark recommendation would you​ make?
e. Yesterday they received a cold call from a stockbroker wanting to sell them an initial public offering in a cable television company. Jessica was worried because the broker promised a​ "no-lose guarantee." Should they invest with this type of​ broker?
f. Name at least five things Pete and Jessica need to look out for when making stock investments.

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