Exam 7: Analyzing Common Stocks

If a firm has an equity multiplier of 3, this means that the firm has $3 in equity for every $1 in long-term debt.

ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of using this expanded version of the ROE formula versus using the simplified version which is net income divided by total equity?

A comparison of a firm's current financial ratios to those of prior years allows one to

In addition to company reports, Value Line also publishes industry analyses.

Company X and Company Y are in the same industry and have the following ratios. Company X Company Y Industry Average Current ratio 1.2 0.89 1.1 Debt/equity 0.20 0.40 0.3 Total asset turnover 1.9 2.1 2.5 Net profit margin 4.2\% 3.8\% 4.0\% Return on equity 12.4\% 14.8\% 15.0\% Dividend payout ratio 25.0\% 10.0\% 20.0\% Discuss the relative natures of the two companies in terms of risk and return. Identify the more growth-oriented firm and justify your selection. Support your discussion and conclusions by referring to the ratios.

A company may appear to be profitable on its income statement, but fail to generate strong cash flows.

Financial ratios I. allow comparisons across firms without concern over firm size. II. can compare a firm's operating and financial status to industry norms. III. provide insights into a companies future. IV. look at the liquidity, activity, leverage, profitability and market measures of a firm.

The government has an expansionary economic policy when it

The current ratio and quick ratio are primarily indicators of how efficiently a company is using its assets.

Company analysis is only concerned with how a company has performed in the past.

Industry analysis focuses on the amount spent on research and development by individual companies within the industry.

What type of investor will be most attracted to industries in the mature growth stage?

A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of $(1,000,000). ROE will be

Which of the following directly impact return on equity? I. net profit margin II. leverage III. return on assets IV. cash flow from investment activities

Banks can use the times interest earned ratio as a measure of a borrower's ability to repay their loan.

The intrinsic value of a security is based on the I. amount of risk. II. current market value of the security. III. discount rate applicable to the security. IV. estimated future cash flows from the security.

The three steps in determining a stock's intrinsic value are I. estimating the stock's future cash flows. II. estimating the risk associated with future cash flows. III. careful analysis of patterns in the stock's recent price history. IV. estimating an appropriate discount rate to apply to future cash flows.

The best time to buy stock is often in the late stages of an economic downturn.

Patriot Auto Parts just reported an EPS of $2.70 on revenues of $660 million. The company has 12 million shares outstanding. Total assets are $570 million, current liabilities equal $117 million, and long-term debt is $183 million. Net fixed assets are worth $345 million. Given this information, which one of the following statements is correct?

The rapid expansion phase of an industry is characterized by