Deck 7: Analyzing Common Stocks

Question 1

Fundamental analysis can only be profitable if some securities are at least temporarily mispriced.

Answer 1

True

Question 2

Firms tend to be more profitable and have higher stock values when the economy is strong.

Answer 2

True

Question 3

An investment should offer an expected return commensurate with the risk involved.

Answer 3

True

Question 4

The security analysis process should help investors to
I)purchase investments that are priced at or above their intrinsic value.
II)sell investments that are priced above their intrinsic value.
III)purchase investments that are priced below their intrinsic value.
IV)identify investments appropriate for their goals.

A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only

Question 5

Which one of the following statements is true?

A) Monetary policy includes adjusting interest rates and determining the level of government taxation.
B) Inflation has little, if any, impact on the economy or the financial markets.
C) Both consumer spending and business investment are key components of the economy.
D) Restrictive fiscal policy tends to increase economic activity.

Question 6

The business cycle reflects economic changes only in the industrial sectors of the economy.

Question 7

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.

A) I and III only
B) III and IV only
C) I, II and III only
D) I, III and IV only

Question 8

Some investment analysts believe that the market processes new information so well and so quickly that securities trade very close to their intrinsic values at all times.These analysts are said to be advocates of

A) fundamental analysis.
B) sector analysis.
C) the efficient market hypothesis.
D) the prevailing price hypothesis.

Question 9

Which measure of the business cycle represents the market value of all goods and services produced in a country over a twelve-month period?

A) industrial production index
B) money supply
C) gross domestic product
D) productivity average

Question 10

Advocates of the efficient market hypothesis would argue that it is virtually impossible for any investor to consistently outperform the market.

Question 11

Economic analysis is relatively useless for investment purposes since the stock market is used to forecast the economy.

Question 12

Fundamental analysis involves the in-depth study of the

A) role of nondiversifiable risk in an investor's portfolio.
B) financial condition and operating results of a given firm.
C) pattern of security prices as revealed in chart formations.
D) role of diversifiable risk in an investor's portfolio.

Question 13

One of the basic premises of security analysis, and in particular fundamental analysis, is that

A) a stock's price is based on its past cash flows rather than on anticipated future cash flows.
B) market sectors do not move in concert with business cycles.
C) all securities have an intrinsic value that their market value will approach over time.
D) a security's risk has relatively little effect on the security's return.

Question 14

Top-down security analysis

A) starts with the fundamental analysis of a firm.
B) includes economic, industry, and fundamental analysis.
C) concentrates on the competency of the senior management of a firm.
D) centers on the past performance of a firm.

Question 15

Developing a general economic outlook assists in the identification of industries and firms that might be good investment opportunities.

Question 16

The Federal Reserve through monetary policy can help expand the economy by

A) lowering income taxes on individuals.
B) reducing tariffs such that foreign exports can increase.
C) supporting a moderate growth of the money supply.
D) increasing government spending on the national infrastructure.

Question 17

The purpose of economic analysis is to gain an insight into the underlying health or vitality of the economy and to formulate expectations about future security prices.

Question 18

An investor should buy a stock only if the prevailing market price exceeds the intrinsic value of the stock.

Question 19

Changes in stock prices tend to lag changes in level of economic activity by several months.

Question 20

According to the efficient markets hypothesis, securities can be substantially mispriced in the marketplace.

Question 21

Industries in the rapid expansion stage will be especially sensitive to a slowing economy.

Question 22

Which of the following business es will be negatively impacted by a strong dollar?

A) retailing
B) imports
C) exports
D) automotive

Question 23

The economy will expand more slowly if consumers decided to save more and reduce their debt levels.

Question 24

To predict the demand for an industrial sector, it is essential to understand the economic forces that affect the industry.

Question 25

List and explain the various stages of the growth cycle of an industry.Also discuss the merit of investing in the industry during each of the various stages.

Question 26

Which of the following factors are considered when analyzing an industry?
I)the nature and conditions of governmental regulations
II)the involvement and relations, if any, with labor unions
III)the development of new technologies relevant to the industry
IV)the extent of competition within the industry

A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 27

Which of the following tend to increase security market prices?
I)An increase in industrial production
II)An increase in corporate profits
III)An increase in the federal deficit when the economy is strong
IV)An increase in interest rates

A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV

Question 28

Economic factors such as a weak dollar will have a negative impact on all industrial sectors.

Question 29

The consumer electronics would be most significantly affected by

A) developments in technology.
B) interest rates and inflation.
C) labor relations.
D) government regulations.

Question 30

Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to
I)be price leaders.
II)benefit more from economies of scale.
III)have better R&D programs.
IV)have lower production costs.

A) II and IV only.
B) I, II and IV only.
C) I, II and III only
D) I, II, III and IV

Question 31

Which one of the following statements is correct?

A) Stock prices are independent of the economic cycle.
B) Stock prices change simultaneously with the economy.
C) Stock prices are often used to predict changes in the economy.
D) Changes in stock prices generally lag changes in the economy.

Question 32

Briefly describe and discuss both industry analysis and fundamental analysis.

Question 33

Rising corporate profits and are likely to have the greatest effect on which of the following industrial sectors?

A) business equipment.
B) defense
C) food and agriculture
D) consumer durables

Question 34

Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is seeking capital gains?

A) initial development
B) mature growth
C) stability or decline
D) rapid expansion

Question 35

When the economic outlook for an industrial sector is strong, the outlook for many of the stocks of firms within that sector will also be strong.

Question 36

The government has an expansionary economic policy when it

A) increases taxes.
B) increases government spending.
C) promotes rising interest rates.
D) limits exports of goods and services.

Question 37

The stage in an industry's growth cycle in which product acceptance is spreading, investors can foresee the industry's future, and overall economic variables have little to do with the industry's overall performance, is known as the

A) initial development stage.
B) rapid expansion stage.
C) mature growth stage.
D) stability or decline stage.

Question 38

Which stage of an industry's growth cycle is most influenced by economic events?

A) initial development
B) stability or decline
C) mature growth
D) rapid expansion

Question 39

Which one of the following is a correct description of an economic measure?

A) The consumer price index is a monthly indicator of changes in the price of goods at various stages of production.
B) The monthly estimate of total sales by the Commerce Department is known as the consumer price index.
C) The unemployment rate shows the number of payroll jobs that exist in the economy.
D) The amount of funds in circulation, in checking, savings and money market accounts and in CDs is referred to as the money supply.

Question 40

Increases in either interest rates or taxes tend to

A) contract the level of economic activity.
B) increase the level of business investment.
C) indicate governmental expansion of the economy.
D) signal the trough of a recessionary market.

Question 41

Which of the following are considered in the company analysis phase of a fundamental analysis of a firm?
I)the composition and growth in sales
II)the capital structure of the firm
III)the outlook of the national economy
IV)the composition and liquidity of the company's assets

A) I and II only
B) I, II and IV only
C) II and IV only
D) I, II, III and IV

Question 42

Return on assets is a very important analytical tool because it measures how effectively management is using a firm's assets to generate profits.

Question 43

For a company to remain in business for the long term, cash flow from operations must generally be a positive number.

Question 44

On September 30, the Simpson Company reported the following information on its financial statements.

What is the amount of the stockholder's equity in the Simpson Company?

A) $243,000
B) $277,000
C) $927,000
D) $3,217,000

Question 45

Cash flow from operations

A) represents the amount of cash generated by the company.
B) is the least important section of the Statement of Cash Flows.
C) is the amount of cash acquired from the borrowing activities of the firm.
D) represents the cash flows from the purchase and sale of long-term assets.

Question 46

EBITDA stands for earnings before inflation, taxes, depreciation, and adjustments.

Question 47

A low cash realization ratio may reveal liquidity problems in a profitable company.

Question 48

Ratio analysis is the study of the relationships between various financial statement accounts.

Question 49

Financial ratios can reveal a lot about a company's liquidity, activity, and profitability.

Question 50

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

Question 51

Which of the following accounting practices are potentially misleading or even fraudulent?
I)capitalization of operating expenses
II)accrual rather than cash basis reporting
III)off-balance sheet liabilities
IV)recognizing revenues prematurely

A) I and II only
B) I, II and IV only
C) III and IV only
D) I, III, and IV only

Question 52

Which one of the following statements concerning accounting reports is correct?

A) The income statement reflects the position of a firm as of a single point in time.
B) The total equity of a firm is equal to the total assets plus the total liabilities.
C) The statement of cash flows identifies both the sources and the uses of cash.
D) The income statement reflects the amount of cash available for investment and financing activities.

Question 53

The income statement indicates how successfully a company has utilized its assets.

Question 54

Fundamental analysis is based on the presumption that the value of a stock is influenced by the financial performance of the issuing company.

Question 55

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)reflect the future outlook of a firm based on analysts projections.
IV)look at the liquidity, activity, leverage, profitability and market measures of a firm.

A) II and IV only
B) I and II only
C) I, II and IV only
D) I, II, III and IV

Question 56

The income statement and balance sheet are linked through the statement of cash flows.

Question 57

Fundamental analysis encompasses return, but not risk, in the valuation process.

Question 58

On March 31, Adolpha, Inc.reported the following information on its financial statements.

What is the available net working capital for Adolpha, Inc.?

A) -$126,922
B) -$66,133
C) $60,789
D) $936,510

Question 59

If a company rewards executives with stock options, core earnings will be lower than net income.

Question 60

Which of the following measures excludes non-cash charges against income.

A) core earnings
B) EBITDA
C) net income before taxes
D) Income from operating activities

Question 61

The Allied Computer Co.has sales of $300 million, a net profit margin of 9%, and 10 million shares of common stock outstanding.It has no preferred stock outstanding.If Allied stock trades at $50 per share, it has a price/earnings ratio of 20.9.

Question 62

Return on equity can be expressed mathematically as "(net profit margin)(total asset turnover)(equity multiplier)."

Question 63

Price-to-book-value indicates how aggressively a stock is being priced.

Question 64

A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5.What is the return on assets?

A) 3.6%
B) 4.5%
C) 8.1%
D) 9.0%

Question 65

Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear

A) more leveraged.
B) less leveraged.
C) more profitable.
D) less efficient.

Question 66

On December 31, the Gold Standard Company reported the following information on its financial statements.

According to this information, the company's current ratio is approximately

A) 1.39.
B) 1.68.
C) 1.73.
D) 1.90.

Question 67

The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2.In this case, the firm is

A) selling its inventory slower than the industry.
B) underperforming the industry.
C) averaging less days of sales in inventory than the industry.
D) generating less sales per dollar of inventory.

Question 68

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.

Question 69

High dividend payout ratios are more of a concern to analysts than low payout ratios.

Question 70

A company has annual sales of $160 million, a net profit margin of 4%, and total assets of $90 million.It carries $10 million in accounts receivable, $25 million in inventory, has $55 million in total debt, and 5 million shares of common stock outstanding.Based on this information, the company's return on equity (ROE)is

A) 4.4%.
B) 7.1%.
C) 11.5%.
D) 18.3%.

Question 71

A lending institution would prefer that a firm have a ________ debt-equity ratio and a ________ times interest earned ratio.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 72

A firm with a very low debt-equity ratio has a low risk of defaulting on its loans.

Question 73

A high P/E ratio may be an indication that a stock is overpriced.

Question 74

In seeking potential stock investments, most analysts look for companies that have PEG ratios that are equal to or less than one.

Question 75

The measure that indicates how efficiently assets are being used to support sales is called the

A) total asset turnover.
B) current ratio.
C) book value.
D) net profit margin.

Question 76

Which of the following are measures of liquidity?
I)net working capital
II)accounts receivable turnover
III)current ratio
IV)times interest earned

A) I and III only
B) I, II and III only
C) I, II and IV only
D) I, III and IV only

Question 77

For their last fiscal year, the Short Company reported the following information.

What is the accounts receivables turnover rate?

A) 0.8
B) 2.8
C) 4.5
D) 7.3

Question 78

A total asset turnover of 3 means that every

A) $1 in sales is supported by $3 of assets.
B) $3 in assets produces $1 in net earnings.
C) $1 in total assets is replaced on average every 3 years.
D) $1 in assets produces $3 in sales.

Question 79

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

Question 80

Return on equity (ROE)is computed by dividing net income by the market value of equity.