Question 1

Aggregate return on equity increases as

Accepted Answer

A)  Profit margins increase. 
B)  Total asset turnover increases. 
C)  Financial leverage increases. 
D)  Equity turnover decreases. 
E)  All of the above. 
A)  Profit margins increase. 
B)  Total asset turnover increases. 
C)  Financial leverage increases. 
D)  Equity turnover decreases. 
E)  All of the above.

Question 2

If interest rates increase due to inflation,but expected cash flows to a firm do not change,then you would expect stock prices to

Accepted Answer

A)  Rise. 
B)  Rise and then decline. 
C)  Remain unchanged. 
D)  Decline. 
E)  None of the above. 
A)  Rise. 
B)  Rise and then decline. 
C)  Remain unchanged. 
D)  Decline. 
E)  None of the above.

Question 3

If,for the S&P Industrials Index,the profit margin was 0.35 and the equity turnover ratio was 10,the ROE would be:

Accepted Answer

A)  0.035% 
B)  2.857% 
C)  3.500% 
D)  28.57% 
E)  35.00% 
A)  0.035% 
B)  2.857% 
C)  3.500% 
D)  28.57% 
E)  35.00%

Question 4

A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables affect the aggregate profit margin except

Accepted Answer

A)  Capacity utilization rate 
B)  Unit labor costs 
C)  Variable labor costs 
D)  Rate of inflation 
E)  Foreign competition 
A)  Capacity utilization rate 
B)  Unit labor costs 
C)  Variable labor costs 
D)  Rate of inflation 
E)  Foreign competition

Question 5

The economy and the stock market have a strong,consistent relationship,but the stock market generally turns before the economy does.

Accepted Answer

A) True 
 B)False

Question 6

Exhibit 12.5
Use the Information Below for the Following Problem(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 12.5.Calculate the P/E multiple.

Accepted Answer

A)  35 
B)  30 
C)  25 
D)  20 
E)  15 
A)  35 
B)  30 
C)  25 
D)  20 
E)  15

Question 7

Exhibit 12.6
Use the Information Below for the Following Problem(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company.
 $\begin{array}{lrr}
\begin{array}{l}
\
\
\text{GDP}\
\text{GDP growth}\
\text{Sales per share}\
\text{Operating profit margin}\
\text{Depreciation/Fixed Assets}\
\text{Fixed asset turnover}\
\text{Interest rate}\
\text{Total asset turnover}\
\text{Debt/Total assets}\
\text{Tax rate}\
\end{array}\
\begin{array}{r}
\
\text{Year 2003}\
\hline
\text{11,000 Billion}\\
 \$ 800 \\\\\\\\
\end{array}\
\begin{array}{r}
Estimated\
\text{Year 2004}\
\hline\ 3.5 \% \\
 12 \% \
 14 \% \
2\
3.5 \% \
 0.7 \
45 \% \
36\%
\end{array}\
\end{array}$ 
In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is
%D Sales per share = 0.015 + 0.75(%∆GDP)
-Refer to Exhibit 12.6.Calculate the firm's level of Total Assets per share for the year 2004.

Accepted Answer

A)  $1050.65 
B)  $1065.67 
C)  $1113.58 
D)  $1190.06 
E)  $1385.77 
A)  $1050.65 
B)  $1065.67 
C)  $1113.58 
D)  $1190.06 
E)  $1385.77

Question 8

The growth rate (g)of dividends is affected by all of the following except

Accepted Answer

A)  Required return 
B)  Retention rate 
C)  Total asset turnover 
D)  Financial leverage 
E)  Net profit margin 
A)  Required return 
B)  Retention rate 
C)  Total asset turnover 
D)  Financial leverage 
E)  Net profit margin

Question 9

Exhibit 12.6
Use the Information Below for the Following Problem(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company.
 $\begin{array}{lrr}
\begin{array}{l}
\
\
\text{GDP}\
\text{GDP growth}\
\text{Sales per share}\
\text{Operating profit margin}\
\text{Depreciation/Fixed Assets}\
\text{Fixed asset turnover}\
\text{Interest rate}\
\text{Total asset turnover}\
\text{Debt/Total assets}\
\text{Tax rate}\
\end{array}\
\begin{array}{r}
\
\text{Year 2003}\
\hline
\text{11,000 Billion}\\
 \$ 800 \\\\\\\\
\end{array}\
\begin{array}{r}
Estimated\
\text{Year 2004}\
\hline\ 3.5 \% \\
 12 \% \
 14 \% \
2\
3.5 \% \
 0.7 \
45 \% \
36\%
\end{array}\
\end{array}$ 
In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is
%D Sales per share = 0.015 + 0.75(%∆GDP)
-Refer to Exhibit 12.6.Estimate the firm's sales per share for the year 2004.

Accepted Answer

A)  $833.04 
B)  $900.08 
C)  $885.03 
D)  $925.56 
E)  $850.75 
A)  $833.04 
B)  $900.08 
C)  $885.03 
D)  $925.56 
E)  $850.75

Question 10

Expected earnings per share estimates requires all of the following except

Accepted Answer

A)  A sales per share estimate. 
B)  A GDP estimate. 
C)  An aggregate operating profit margin estimate 
D)  An estimate of the real risk-free rate. 
E)  A tax rate estimate. 
A)  A sales per share estimate. 
B)  A GDP estimate. 
C)  An aggregate operating profit margin estimate 
D)  An estimate of the real risk-free rate. 
E)  A tax rate estimate.

Question 11

A major advantage of the cyclical indicator approach is that it spans all important major economic sectors including the service sector and import-exports.

Accepted Answer

A) True 
 B)False

Question 12

Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60 percent,the required rate of return is 11%,and the dividend growth rate is 8%.

Accepted Answer

A)  15 
B)  20 
C)  25 
D)  30 
E)  35 
A)  15 
B)  20 
C)  25 
D)  30 
E)  35

Question 13

Jensen,Johnson,and Mercer showed that the relationship between stock returns and size and price-to-book ratio holds in periods when monetary policy is

Accepted Answer

A)  Neutral. 
B)  Tight. 
C)  Easy. 
D)  All of the above. 
E)  None of the above. 
A)  Neutral. 
B)  Tight. 
C)  Easy. 
D)  All of the above. 
E)  None of the above.

Question 14

The dividend payout ratio,the required rate of return on common equity,and the expected growth rate of stock dividends are the major variables that affect

Accepted Answer

A)  The profit margin for the S&P Industrials Index. 
B)  The earnings multiplier for common stock. 
C)  Aggregate tax revenues. 
D)  Capital gains tax revenues. 
E)  Aggregate GDP. 
A)  The profit margin for the S&P Industrials Index. 
B)  The earnings multiplier for common stock. 
C)  Aggregate tax revenues. 
D)  Capital gains tax revenues. 
E)  Aggregate GDP.

Question 15

It is reasonable to expect corporate sales to be closely related to GNP.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 12.2
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.2.To what price will the market rise if the earnings expectation is $32.00?

Accepted Answer

A)  $384.00 
B)  $266.56 
C)  $213.44 
D)  $200.00 
E)  $125.44 
A)  $384.00 
B)  $266.56 
C)  $213.44 
D)  $200.00 
E)  $125.44

Question 17

The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 12.8
Use the Information Below for the Following Problem(S)
As an economist for a research firm you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55%. Long-term government bond rates are at 6% and the equity risk premium is estimated to be 3%. Return on equity (ROE) is estimated to be 11%.
-Refer to Exhibit 12.8.What is your expectation of the market P/E ratio?

Accepted Answer

A)  9.17 
B)  11.11 
C)  13.58 
D)  18.33 
E)  21.42 
A)  9.17 
B)  11.11 
C)  13.58 
D)  18.33 
E)  21.42

Question 19

The dividend payout ratio for the aggregate market is 50 percent,the required rate of return is 16 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

Accepted Answer

A)  5 
B)  2.81 
C)  7.5 
D)  4 
E)  None of the above 
A)  5 
B)  2.81 
C)  7.5 
D)  4 
E)  None of the above

Question 20

As the market's return on equity increases so will the P/E ratio.

Accepted Answer

A) True 
 B)False

Exam 12: Macroanalysis and Microvaluation of the Stock Market

Aggregate return on equity increases as

If interest rates increase due to inflation,but expected cash flows to a firm do not change,then you would expect stock prices to

If,for the S&P Industrials Index,the profit margin was 0.35 and the equity turnover ratio was 10,the ROE would be:

A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables affect the aggregate profit margin except

The economy and the stock market have a strong,consistent relationship,but the stock market generally turns before the economy does.

The growth rate (g)of dividends is affected by all of the following except

Expected earnings per share estimates requires all of the following except

A major advantage of the cyclical indicator approach is that it spans all important major economic sectors including the service sector and import-exports.

Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60 percent,the required rate of return is 11%,and the dividend growth rate is 8%.

Jensen,Johnson,and Mercer showed that the relationship between stock returns and size and price-to-book ratio holds in periods when monetary policy is

The dividend payout ratio,the required rate of return on common equity,and the expected growth rate of stock dividends are the major variables that affect

It is reasonable to expect corporate sales to be closely related to GNP.

The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.

The dividend payout ratio for the aggregate market is 50 percent,the required rate of return is 16 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

As the market's return on equity increases so will the P/E ratio.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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