Module 13 Part 2 - Psych 126 - Managing Your Personal Finances

Five Bookmarks:

Review/Preview
Learning Objectives:

Class Activities:   

1st    Discuss Budgets and/or Balance Sheets.

2nd    Accomplish Learning Objective #4.

Describe Differences in the Nature of the Two Volumes Comprising Value Line

Type "Dogs of the Dow" into a Search Engine (such as Alta Vista).
Examine at least three of the sites which describe the theory.
Restate the theory behind "Dogs of the Dow in your own words.

(Class will not meet in its regularly scheduled classroom during Module 14, Part 1.  During Module 14, Part 1, make plans to return to the Library (either uptown in Martinsville or at PHCC Library's Carter Memorial Room) and complete the forms given by the instructor on four companies assigned to your team during the previous class session Module 13 Part I, and prioritize these as to which, in your opinion, is the better investment at this time.  Be prepared to brief the class on your results.)

Other notable items:

1.  The P/E ratio cannot be used to evaluate companies that are not currently earning money, a common condition these days.  In such instances, Price to Sales (P/S) can be used.  Divide the share price by trailing 12-month sales per share.  Trailing sales is found on a company's income statement. A ratio of 1/1 says a company sells a dollar of sales for each dollar of price.  As with P/E, the lower this ratio, the better.

2.  If neither P/E nor P/S is available, divide the company's current market capitalization (number of shares outstanding multiplied by stock price) by trailing sales found on the income statement.  A ratio of 1/1 says a company sells a dollar of sales for each dollar of price.  As with P/E and P/S, the lower this ratio, the better.

3.  Sometimes P/E cannot be used because a company's earnings are negative or highly variable.  In such cases, some investors shun P/S as well because gross revenues don't tell you how much a company actually retains for paying dividends, buying back stock, reducing debt, and reinvesting in itself.  In arriving at earnings, companies subtract not only expenses from revenues, they also set aside monies for depreciation and amortization.    So to see how much money a company is really generating, smart investors calculate price-to-cash flow.  To do this, look in the company's cash flow statement.  Dividing the company's cash flow by its market capitalization  gives you cash flow per share.  That's a measure of how much each investor is paying for each dollar flowing into the business.

4.  Another evaluation measure is called price-to-book ratio.  A companies assets minus its liabilities is called its net worth, or book value, and such figures come from the company's balance sheet.  It's like your own net worth after you've subtracted the things you owe to others from the things you own.  A low price to book ratio is more desirable to a would-be investor.  For example, a ratio of less than 1 would suggest that you are buying the company for less than the value of its net assets.

Use this web page to record facts about four companies from the Dogs-of-the-Dow Theory which you can use to brief the class.

3rd    Accomplish Learning Objective #5.

Summary:

Homework:

"All people smile in the same language."