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LOS a: Differentiate between 1) a growth company and a growth stock, 2) a defensive company and a defensive stock, 3) a cyclical company and a cyclical stock, 4) a speculative company and a speculative stock, and 5) a value stock and a growth stock.

Which of the following statements regarding growth companies and growth stocks is TRUE? A growth:

A)
company has management that has the ability to consistently select projects that earn higher returns than required by their risk.

B)
company will earn above normal returns given its risk.

C)
stock is one that has a price that is greater than its intrinsic value.

If the market has identified the company as a growth company and bid up the price, the stock may have below normal returns. The stock price may be more (typically) or less than intrinsic value.

Mamford Industries has solid earnings that are projected to grow steadily into the foreseeable future. Which of the following is TRUE?

A)	Mamford's stock is considered a growth stock.

B)	Mamford is a growth company.

C)	Mamford is a growth company and its stock is a growth stock.

Based upon the information, all we can say is that Mamford is a growth company. The stock may be overpriced and not in a position to grow.

An analyst discovers a company with solid earnings but with no prospect of growth. The company could still recommend it as a growth stock:

A)	if the market price of the stock is below its intrinsic value.

B)	if the earnings remain solid.

C)	under no circumstances.

Whether a stock is a growth stock depends only upon whether its market price is below its intrinsic value. Quality of earnings and type of firm are factors in estimating the intrinsic value, but the primary issue is whether current valuation is such that the stock is expected to grow in value in the future.