Deck 14: Company Analysis and Stock Valuation

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Question
A defensive company is one whose sales, earnings and cash flows are strongly correlated with the business cycle.
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Question
A growth company is one whose stock is undervalued by the market.
Question
Price-to-sales ratio is still considered the predominant firm valuation technique.
Question
In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).
Question
The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
Question
A firm's competitive strategy can be either defensive or offensive.
Question
The constant growth dividend growth model is not appropriate for the valuation of growth companies.
Question
An overvalued stock is a non-growth stock.
Question
A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough during the year to cover its total cost of capital and the value of the firm has declined.
Question
Turnarounds are firms with valuable assets that are hidden on the balance sheet.
Question
The best known measure of relative value for common stock is the P/E ratio.
Question
A stock with low systematic risk is considered to be a defensive stock.
Question
A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.
Question
While EVA is considered an internal performance measure, MVA is considered to be an external performance measure.
Question
An undervalued stock is a growth stock.
Question
A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
Question
By definition growth companies have growth stocks.
Question
Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.
Question
With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.
Question
Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.
Question
According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm's product is the latest craze.
Question
Operating free cash flow and Free cash flow to equity are equivalent cash flow concepts.
Question
In a(n) ____ strategy, a firm seeks to identify itself as unique within its industry.

A)Defensive
B)Offensive
C)Low-cost
D)Differentiation
E)None of the above
Question
Which of the following statements concerning SWOT analysis is false?

A)Strengths are the factors that give the firm a comparative advantage in the marketplace.
B)Weaknesses result when the company has potentially exploitable advantages over other firms.
C)Opportunities are environmental factors that favor the firm.
D)Threats are environmental factors that can hinder the firm in achieving its goals.
E)None of the above (that is, all statements are true)
Question
A cyclical stock's rate of return is not expected to decline during an overall market decline.
Question
Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.
Question
A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

A)Growth
B)Defensive
C)Cyclical
D)Speculative
E)Value
Question
A growth company is one that has the ability to

A)Acquire capital at a low cost and is able to invest in projects that yield an average return.
B)Acquire capital at a low cost and is able to invest in projects that yield a below average return.
C)Acquire capital at an average cost and is able to invest in projects that yield an above average return.
D)Acquire capital at an average cost and is able to invest in projects that yield an average return.
E)Acquire capital at an above average cost and is able to invest in projects that yield an average return.
Question
Based on the annual reports of Walgreens it has pursued both a low-cost strategy and a differentiation strategy for different business segments.
Question
An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.
Question
One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.
Question
To benefit from cost leadership a firm must command prices near the industry average.
Question
A speculative stock possesses a ____ probability of ____ return and is currently ____.

A)High, negative, underpriced.
B)High, negative, overpriced.
C)High, positive, overpriced.
D)Low, negative, overpriced.
E)Low, positive, underpriced.
Question
The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).
Question
Peter Lynch identified a number of attributes of firms that may result in favorable stock market performances, including

A)Products that are faddish, people like change.
B)Firms that have competitive advantages over their rivals.
C)Firms that can benefit from cost reductions.
D)Choices b and c only
E)All of the above
Question
Porter contends that ____ and ____ are two important competitive strategies.

A)Low cost leadership, barrier to entry
B)New entrant deterrent, differentiation
C)Low cost leadership, differentiation
D)Differentiation, monopolistic
E)Monopolistic simulation, differentiation
Question
According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm buys back its shares.
Question
In SWOT analysis, one examines all of the following factors, except

A)Strengths.
B)Weaknesses.
C)Opportunities.
D)Threats.
E)Turnarounds.
Question
Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.
Question
Two major competitive strategies are low-cost leadership and low-price leadership.
Question
Which of the following statements concerning global company analysis is false?

A)Analysis of companies within industries should be extended to include foreign companies.
B)There is a problem in obtaining data that is required for a thorough company analysis of foreign companies.
C)Foreign companies' financial risk should be evaluated over time.
D)Differences in relative measures can be explained by the variations in accounting procedures among countries and investors attitudes within each country.
E)None of the above (that is, all statements are true)
Question
Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
<strong>Exhibit 14.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)   Refer to Exhibit 14.1. In the listing above, which three factors influence the capital gain component of a growth company?</strong> A)1, 3, and 5 B)2, 3, and 4 C)2, 3, and 6 D)3, 4, and 5 E)3, 4, and 6 <div style=padding-top: 35px>
Refer to Exhibit 14.1. In the listing above, which three factors influence the capital gain component of a growth company?

A)1, 3, and 5
B)2, 3, and 4
C)2, 3, and 6
D)3, 4, and 5
E)3, 4, and 6
Question
Which of the following is not a value added performance measure?

A)Economic Value Added (EVA)
B)Market Value Added (MVA)
C)Franchise Factor
D)Company Value Added (CVA)
E)None of the above (that is, all are value added performance measures)
Question
Evidence that a firm has high business risk would be provided by its volatile ____.

A)Fixed costs.
B)Profit after taxes.
C)Operating profit.
D)Sales.
E)Employee turnover.
Question
In Berkshire Hathoway annual reports Warren Buffet highlights business tenets that he believes are important. Which of the following is not a business tenet of Warren Buffet?

A)Is the business unique and technologically advanced?
B)Does the business have a consistent operating history?
C)Does the business have favorable long-term prospects?
D)a and b above.
E)All of the above are business tenets of Warren Buffet.
Question
Which of the following is not a technique for valuing a firm's common stock?

A)Present value of free cash flow to equity
B)Present value of dividends
C)Price-earnings ratio
D)Price-book value ratios
E)Price-cost of goods sold ratio
Question
Market value-added is a measure of ____ performance.

A)External
B)Internal
C)Competitive
D)Economic
E)None of the above
Question
Which of the following is not considered when looking at free cash flow to equity technique?

A)Depreciation expense
B)Change in working capital
C)Principal debt repayments
D)Change in competitive environment
E)Net income
Question
Which of the following is not considered a relative valuation technique?

A)Price-earnings ratio
B)Price/cash flow ratio
C)Price/book value ratio
D)Price/cost of goods sold ratio
E)Price/sales ratio
Question
The following are tenets of Warren Buffett:

A)Business tenets.
B)Financial tenets.
C)Management tenets.
D)All of the above.
E)None of the above.
Question
In Berkshire Hathoway annual reports Warren Buffet highlights financial tenets that he believes are important. Which of the following is not a financial tenet of Warren Buffet?

A)Focus on return on equity (ROE) not earnings per share (EPS).
B)Calculate owner earnings similar to free cash flow after capital expenditures.
C)High profit margins relative to the industry.
D)Company should create at least one dollar of market value for every dollar retained.
E)All of the above are financial tenets of Warren Buffet.
Question
A set of performance measures called ____ are directly related to the capital budgeting techniques used in corporate finance.

A)Dividend discount model
B)Aggressive growth indexes
C)Growth indexes
D)Value added
E)Profit sensitization
Question
Which of the following is not considered in the price-earnings ratio technique?

A)Firm's required rate of return on equity (k)
B)Firm's dividend payout ratio (D/E)
C)Firm's expected growth rate of dividends (g)
D)All of the above are components of P/E ratio
E)None of the above are components of P/E ratio
Question
"Economic profit" is analogous to ____ in capital budgeting.

A)Weighted average cost of capital
B)Internal rate of return
C)Composite discount rates
D)Discounted cashflows
E)Net present value
Question
Which of the following factors does not indicate market liquidity?

A)Number of shareholders
B)High price volatility
C)Number of shares outstanding
D)Number of shares traded
E)Institutional interest
Question
An inconsistency between a stock's P/E ratio and growth rate can be attributed to all of the following, except

A)A major difference in the risk involved.
B)Inaccurate growth estimates.
C)An undervaluation of the stock.
D)An overvaluation of the stock.
E)Competition.
Question
Under the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's

A)Weighted average cost of capital.
B)Cost of debt.
C)Internal rate of return.
D)External cost of new equity.
E)Net present value.
Question
Which of the following is a business tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Question
A growth company can invest in projects that generate a return greater than the firm's

A)Return on equity.
B)Cost of debt.
C)Cost of equity.
D)Cost of capital.
E)Return on assets.
Question
Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
<strong>Exhibit 14.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)   Refer to Exhibit 14.1. In the listing above, which three factors influence the earnings multiple for a stock?</strong> A)1, 4, and 5 B)1, 4, and 6 C)2, 4, and 6 D)2, 5, and 6 E)4, 5, and 6 <div style=padding-top: 35px>
Refer to Exhibit 14.1. In the listing above, which three factors influence the earnings multiple for a stock?

A)1, 4, and 5
B)1, 4, and 6
C)2, 4, and 6
D)2, 5, and 6
E)4, 5, and 6
Question
What is the implied growth duration of Casey Industries given the following: <strong>What is the implied growth duration of Casey Industries given the following:  </strong> A)3.2 years B)2.8 years C)4.8 years D)9.6 years E)13.2 years <div style=padding-top: 35px>

A)3.2 years
B)2.8 years
C)4.8 years
D)9.6 years
E)13.2 years
Question
What variables impact the Price/Sales ratio?

A)Sales growth rate, volatility of sales growth, profit margin
B)Earnings growth rate, volatility of sales growth, profit margin
C)Earnings growth rate, volatility of sales growth, operating margin
D)Sales growth rate, volatility of sales growth, operating margin
E)Sales growth rate, volatility of profit margin, profit margin
Question
A growth company may exist for all of the following reasons except

A)The company holds patents.
B)The company possess unique distribution or marketing strategies.
C)The company is in a competitive environment.
D)Significant barriers to entry exist.
E)All of the above are reasons a growth company may exist.
Question
Walgreen's higher P/BV ratio than the market or industry is most likely attributed to Walgreen's

A)Consistently higher ROE
B)Difference in WACC
C)Marketing strategy
D)Lower cost of assets
E)None of the above
Question
A firm that follows a low cost leadership strategy

A)Must heavily discount its prices.
B)Must command prices near the industry average.
C)Must focus on providing exceptional quality and service.
D)All of the above.
E)None of the above.
Question
When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

A)Defensive strategy
B)Differentiation strategy
C)Low-cost strategy
D)Focused strategy
E)Value strategy
Question
The franchise P/E is a function of

A)Relative rate of return on new business opportunities
B)Size of superior return opportunities.
C)Duration of earnings growth.
D)a and b
E)a, b and c
Question
A firm that follows a differentiation strategy

A)Must heavily discount its prices.
B)Must command prices near the industry average.
C)Must focus on providing exceptional quality and service.
D)All of the above.
E)None of the above.
Question
Defensive companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Question
Which of the following is not considered a favorable attribute of firms by Peter Lynch?

A)Firm's product is not faddish
B)Firm has a sustainable comparative competitive advantage over its rivals
C)Firm's industry or product has market stability
D)Firm can benefit from cost reductions
E)All of the above are considered favorable attributes by Peter Lynch
Question
Which of the following is a management tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Question
Speculative companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Question
Which of the following is not a determinant of the capital gain component?

A)The percentage of earnings retained for reinvestment.
B)The relative rate of return earned on the funds retained.
C)The time period for these growth investments.
D)The amount of capital invested in growth investments.
E)All of the above are determinants of the capital gain component.
Question
What is the implied growth duration of Bowe Industries given the following: <strong>What is the implied growth duration of Bowe Industries given the following:  </strong> A)3.2 years B)6.6 years C)8.6 years D)9.7 years E)10.6 years <div style=padding-top: 35px>

A)3.2 years
B)6.6 years
C)8.6 years
D)9.7 years
E)10.6 years
Question
Cyclical companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Question
Which of the following is a financial tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish.
Question
Which of the following ratios is least likely to be impacted by accounting manipulation?

A)P/E
B)ROE
C)ROI
D)P/S
E)PM
Question
When using the Present Value of Operating Free Cash Flow model, the firm's operating free cash flow to the firm is discounted by the firm's:

A)Cost of equity
B)Cost of debt
C)Required rate of return
D)Weighted Average Cost of Capital
E)Beta-adjusted cost of equity
Question
Which of the following is a market tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Question
Studies that have examined the relationship between EVA and MVA have found

A)An inverse relationship.
B)A positive relationship.
C)A poor relationship.
D)EVA always exceeded MVA.
E)MVA always exceeded EVA.
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Deck 14: Company Analysis and Stock Valuation
1
A defensive company is one whose sales, earnings and cash flows are strongly correlated with the business cycle.
False
2
A growth company is one whose stock is undervalued by the market.
False
3
Price-to-sales ratio is still considered the predominant firm valuation technique.
False
4
In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).
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5
The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
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6
A firm's competitive strategy can be either defensive or offensive.
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7
The constant growth dividend growth model is not appropriate for the valuation of growth companies.
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8
An overvalued stock is a non-growth stock.
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9
A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough during the year to cover its total cost of capital and the value of the firm has declined.
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10
Turnarounds are firms with valuable assets that are hidden on the balance sheet.
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11
The best known measure of relative value for common stock is the P/E ratio.
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12
A stock with low systematic risk is considered to be a defensive stock.
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13
A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.
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14
While EVA is considered an internal performance measure, MVA is considered to be an external performance measure.
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15
An undervalued stock is a growth stock.
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16
A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
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17
By definition growth companies have growth stocks.
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18
Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.
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19
With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.
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20
Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.
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21
According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm's product is the latest craze.
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22
Operating free cash flow and Free cash flow to equity are equivalent cash flow concepts.
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23
In a(n) ____ strategy, a firm seeks to identify itself as unique within its industry.

A)Defensive
B)Offensive
C)Low-cost
D)Differentiation
E)None of the above
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24
Which of the following statements concerning SWOT analysis is false?

A)Strengths are the factors that give the firm a comparative advantage in the marketplace.
B)Weaknesses result when the company has potentially exploitable advantages over other firms.
C)Opportunities are environmental factors that favor the firm.
D)Threats are environmental factors that can hinder the firm in achieving its goals.
E)None of the above (that is, all statements are true)
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25
A cyclical stock's rate of return is not expected to decline during an overall market decline.
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26
Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.
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27
A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

A)Growth
B)Defensive
C)Cyclical
D)Speculative
E)Value
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28
A growth company is one that has the ability to

A)Acquire capital at a low cost and is able to invest in projects that yield an average return.
B)Acquire capital at a low cost and is able to invest in projects that yield a below average return.
C)Acquire capital at an average cost and is able to invest in projects that yield an above average return.
D)Acquire capital at an average cost and is able to invest in projects that yield an average return.
E)Acquire capital at an above average cost and is able to invest in projects that yield an average return.
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29
Based on the annual reports of Walgreens it has pursued both a low-cost strategy and a differentiation strategy for different business segments.
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30
An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.
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31
One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.
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32
To benefit from cost leadership a firm must command prices near the industry average.
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33
A speculative stock possesses a ____ probability of ____ return and is currently ____.

A)High, negative, underpriced.
B)High, negative, overpriced.
C)High, positive, overpriced.
D)Low, negative, overpriced.
E)Low, positive, underpriced.
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34
The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).
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35
Peter Lynch identified a number of attributes of firms that may result in favorable stock market performances, including

A)Products that are faddish, people like change.
B)Firms that have competitive advantages over their rivals.
C)Firms that can benefit from cost reductions.
D)Choices b and c only
E)All of the above
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
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36
Porter contends that ____ and ____ are two important competitive strategies.

A)Low cost leadership, barrier to entry
B)New entrant deterrent, differentiation
C)Low cost leadership, differentiation
D)Differentiation, monopolistic
E)Monopolistic simulation, differentiation
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37
According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm buys back its shares.
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38
In SWOT analysis, one examines all of the following factors, except

A)Strengths.
B)Weaknesses.
C)Opportunities.
D)Threats.
E)Turnarounds.
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39
Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.
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40
Two major competitive strategies are low-cost leadership and low-price leadership.
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41
Which of the following statements concerning global company analysis is false?

A)Analysis of companies within industries should be extended to include foreign companies.
B)There is a problem in obtaining data that is required for a thorough company analysis of foreign companies.
C)Foreign companies' financial risk should be evaluated over time.
D)Differences in relative measures can be explained by the variations in accounting procedures among countries and investors attitudes within each country.
E)None of the above (that is, all statements are true)
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42
Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
<strong>Exhibit 14.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)   Refer to Exhibit 14.1. In the listing above, which three factors influence the capital gain component of a growth company?</strong> A)1, 3, and 5 B)2, 3, and 4 C)2, 3, and 6 D)3, 4, and 5 E)3, 4, and 6
Refer to Exhibit 14.1. In the listing above, which three factors influence the capital gain component of a growth company?

A)1, 3, and 5
B)2, 3, and 4
C)2, 3, and 6
D)3, 4, and 5
E)3, 4, and 6
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43
Which of the following is not a value added performance measure?

A)Economic Value Added (EVA)
B)Market Value Added (MVA)
C)Franchise Factor
D)Company Value Added (CVA)
E)None of the above (that is, all are value added performance measures)
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44
Evidence that a firm has high business risk would be provided by its volatile ____.

A)Fixed costs.
B)Profit after taxes.
C)Operating profit.
D)Sales.
E)Employee turnover.
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45
In Berkshire Hathoway annual reports Warren Buffet highlights business tenets that he believes are important. Which of the following is not a business tenet of Warren Buffet?

A)Is the business unique and technologically advanced?
B)Does the business have a consistent operating history?
C)Does the business have favorable long-term prospects?
D)a and b above.
E)All of the above are business tenets of Warren Buffet.
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k this deck
46
Which of the following is not a technique for valuing a firm's common stock?

A)Present value of free cash flow to equity
B)Present value of dividends
C)Price-earnings ratio
D)Price-book value ratios
E)Price-cost of goods sold ratio
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
47
Market value-added is a measure of ____ performance.

A)External
B)Internal
C)Competitive
D)Economic
E)None of the above
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
48
Which of the following is not considered when looking at free cash flow to equity technique?

A)Depreciation expense
B)Change in working capital
C)Principal debt repayments
D)Change in competitive environment
E)Net income
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
49
Which of the following is not considered a relative valuation technique?

A)Price-earnings ratio
B)Price/cash flow ratio
C)Price/book value ratio
D)Price/cost of goods sold ratio
E)Price/sales ratio
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
50
The following are tenets of Warren Buffett:

A)Business tenets.
B)Financial tenets.
C)Management tenets.
D)All of the above.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
51
In Berkshire Hathoway annual reports Warren Buffet highlights financial tenets that he believes are important. Which of the following is not a financial tenet of Warren Buffet?

A)Focus on return on equity (ROE) not earnings per share (EPS).
B)Calculate owner earnings similar to free cash flow after capital expenditures.
C)High profit margins relative to the industry.
D)Company should create at least one dollar of market value for every dollar retained.
E)All of the above are financial tenets of Warren Buffet.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
52
A set of performance measures called ____ are directly related to the capital budgeting techniques used in corporate finance.

A)Dividend discount model
B)Aggressive growth indexes
C)Growth indexes
D)Value added
E)Profit sensitization
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
53
Which of the following is not considered in the price-earnings ratio technique?

A)Firm's required rate of return on equity (k)
B)Firm's dividend payout ratio (D/E)
C)Firm's expected growth rate of dividends (g)
D)All of the above are components of P/E ratio
E)None of the above are components of P/E ratio
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
54
"Economic profit" is analogous to ____ in capital budgeting.

A)Weighted average cost of capital
B)Internal rate of return
C)Composite discount rates
D)Discounted cashflows
E)Net present value
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
55
Which of the following factors does not indicate market liquidity?

A)Number of shareholders
B)High price volatility
C)Number of shares outstanding
D)Number of shares traded
E)Institutional interest
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
56
An inconsistency between a stock's P/E ratio and growth rate can be attributed to all of the following, except

A)A major difference in the risk involved.
B)Inaccurate growth estimates.
C)An undervaluation of the stock.
D)An overvaluation of the stock.
E)Competition.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
57
Under the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's

A)Weighted average cost of capital.
B)Cost of debt.
C)Internal rate of return.
D)External cost of new equity.
E)Net present value.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
58
Which of the following is a business tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
59
A growth company can invest in projects that generate a return greater than the firm's

A)Return on equity.
B)Cost of debt.
C)Cost of equity.
D)Cost of capital.
E)Return on assets.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
60
Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
<strong>Exhibit 14.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)   Refer to Exhibit 14.1. In the listing above, which three factors influence the earnings multiple for a stock?</strong> A)1, 4, and 5 B)1, 4, and 6 C)2, 4, and 6 D)2, 5, and 6 E)4, 5, and 6
Refer to Exhibit 14.1. In the listing above, which three factors influence the earnings multiple for a stock?

A)1, 4, and 5
B)1, 4, and 6
C)2, 4, and 6
D)2, 5, and 6
E)4, 5, and 6
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
61
What is the implied growth duration of Casey Industries given the following: <strong>What is the implied growth duration of Casey Industries given the following:  </strong> A)3.2 years B)2.8 years C)4.8 years D)9.6 years E)13.2 years

A)3.2 years
B)2.8 years
C)4.8 years
D)9.6 years
E)13.2 years
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
62
What variables impact the Price/Sales ratio?

A)Sales growth rate, volatility of sales growth, profit margin
B)Earnings growth rate, volatility of sales growth, profit margin
C)Earnings growth rate, volatility of sales growth, operating margin
D)Sales growth rate, volatility of sales growth, operating margin
E)Sales growth rate, volatility of profit margin, profit margin
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
63
A growth company may exist for all of the following reasons except

A)The company holds patents.
B)The company possess unique distribution or marketing strategies.
C)The company is in a competitive environment.
D)Significant barriers to entry exist.
E)All of the above are reasons a growth company may exist.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
64
Walgreen's higher P/BV ratio than the market or industry is most likely attributed to Walgreen's

A)Consistently higher ROE
B)Difference in WACC
C)Marketing strategy
D)Lower cost of assets
E)None of the above
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
65
A firm that follows a low cost leadership strategy

A)Must heavily discount its prices.
B)Must command prices near the industry average.
C)Must focus on providing exceptional quality and service.
D)All of the above.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
66
When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

A)Defensive strategy
B)Differentiation strategy
C)Low-cost strategy
D)Focused strategy
E)Value strategy
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Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
67
The franchise P/E is a function of

A)Relative rate of return on new business opportunities
B)Size of superior return opportunities.
C)Duration of earnings growth.
D)a and b
E)a, b and c
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
68
A firm that follows a differentiation strategy

A)Must heavily discount its prices.
B)Must command prices near the industry average.
C)Must focus on providing exceptional quality and service.
D)All of the above.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
69
Defensive companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
70
Which of the following is not considered a favorable attribute of firms by Peter Lynch?

A)Firm's product is not faddish
B)Firm has a sustainable comparative competitive advantage over its rivals
C)Firm's industry or product has market stability
D)Firm can benefit from cost reductions
E)All of the above are considered favorable attributes by Peter Lynch
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
71
Which of the following is a management tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
72
Speculative companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
73
Which of the following is not a determinant of the capital gain component?

A)The percentage of earnings retained for reinvestment.
B)The relative rate of return earned on the funds retained.
C)The time period for these growth investments.
D)The amount of capital invested in growth investments.
E)All of the above are determinants of the capital gain component.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
74
What is the implied growth duration of Bowe Industries given the following: <strong>What is the implied growth duration of Bowe Industries given the following:  </strong> A)3.2 years B)6.6 years C)8.6 years D)9.7 years E)10.6 years

A)3.2 years
B)6.6 years
C)8.6 years
D)9.7 years
E)10.6 years
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
75
Cyclical companies are firms where

A)Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B)Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C)Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D)Sales, earnings and cash flows are growing exponentially.
E)None of the above.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
76
Which of the following is a financial tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
77
Which of the following ratios is least likely to be impacted by accounting manipulation?

A)P/E
B)ROE
C)ROI
D)P/S
E)PM
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
78
When using the Present Value of Operating Free Cash Flow model, the firm's operating free cash flow to the firm is discounted by the firm's:

A)Cost of equity
B)Cost of debt
C)Required rate of return
D)Weighted Average Cost of Capital
E)Beta-adjusted cost of equity
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
79
Which of the following is a market tenet of Warren Buffett?

A)Long term prospects.
B)Resistance to institutional imperative.
C)Creation of one dollar of market value for every dollar retained.
D)Purchase at discount to intrinsic value.
E)Product is not faddish
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
80
Studies that have examined the relationship between EVA and MVA have found

A)An inverse relationship.
B)A positive relationship.
C)A poor relationship.
D)EVA always exceeded MVA.
E)MVA always exceeded EVA.
Unlock Deck
Unlock for access to all 133 flashcards in this deck.
Unlock Deck
k this deck
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Unlock Deck
Unlock for access to all 133 flashcards in this deck.