Deck 17: Company Analysis

Question 1

In a top-down approach to fundamental analysis the last step is:

A) economic analysis.
B) industry analysis.
C) company analysis.
D) The order of analysis does not matter in fundamental analysis.

Answer 1

company analysis.

Question 2

In order to calculate the intrinsic value of a stock using the multiplier method, analysts often determine the:

A) annualized EPS.
B) realized EPS.
C) estimated EPS.
D) normalized EPS.

Answer 2

estimated EPS.

Question 3

In order to calculate the intrinsic value of the stock analysts often use the normalized EPS for a company under typical operating conditions which:

A) does not make any adjustments to earnings since all earnings are normal.
B) adjusts earnings by deducting out the normal component and discounts the rest.
C) allows the analyst discretion to determine what is normal and what is not.
D) adjusts for unusual impacts on earnings such as non-recurring or extraordinary earnings..

Answer 3

adjusts for unusual impacts on earnings such as non-recurring or extraordinary earnings..

Question 4

Which of the following is not shown on the balance sheet on book value basis?

A) land
B) shareholders' equity
C) marketable securities
D) property and equipment

Question 5

Which of the following statements regarding retained earnings is not true?

A) It is part of shareholders' equity.
B) Along with cash it represents spendable funds for a company.
C) It is previous earnings that have not been paid out as dividends.
D) All of these statements are true.

Question 6

The standard assumption in security analysis is that g represents the growth rate for:

A) both dividends and earnings.
B) dividends only.
C) earnings only.
D) dividends and retained earnings.

Question 7

Financial ratios that can be calculated solely from the Balance Sheet include all of the following except:

A) Return on Assets
B) Current Ratio
C) Debt-to-Total Assets Ratio
D) All of the above can be calculated from the Balance Sheet

Question 8

In which of the following sections of a balance sheet are Inventories listed?

A) Current assets
B) Property, plant and equipment, at cost
C) Current liabilities
D) Shareholders' Equity

Question 9

On a balance sheet, under what section are the Retained Earnings listed?

A) Current assets
B) Property, plant and equipment, at cost
C) Current liabilities
D) Stockholders' equity

Question 10

A qualified auditor's report is:

A) allowed in all provinces.
B) allowed when the auditor deviates from generally accepted accounting principles.
C) a signal that the company has quality earnings
D) a signal that the statements may not fairly represent the company's financial position.

Question 11

Which of the following statements is false concerning EPS?

A) EPS is not a precise figure that is readily comparable over time.
B) EPS for different companies that are comparable to each other.
C) The EPS of a corporation is not required to reflect GAAP.
D) Although GAAP is used in determining EPS, alternative EPS estimates are possible.

Question 12

What is the dividend payout ratio with P = $25, E = $10, and D = $2.50?

A) 10 per cent
B) 40 per cent
C) 25 per cent
D) 16.7 per cent

Question 13

Which of the following identities calculates EPS?:

A) ROA X Total Assets/Shareholders' Equity
B) book value per share X Total Assets/Shareholders' Equity.
C) ROE X book value per share
D) ROA X book value per share.

Question 14

Aside from ROE being calculated as Net income/Shareholders' equity, it can be expressed as a product of:

A) ROA and book value per share.
B) ROA and leverage.
C) ROA and profit margin.
D) leverage and book value per share.

Question 15

Which of the following is not a financial ratio used to calculate ROE?

A) economic efficiency
B) EBIT efficiency
C) asset turnover
D) leverage

Question 16

The internal (sustainable) growth rate is a function of:

A) g = ROA X (1 - Payout Ratio)
B) g = ROA X (1 - Retention Ratio)
C) g = ROE X (1 - Retention Ratio)
D) g = ROE X (1 - Payout ratio)

Question 17

When performing fundamental security analysis using EPS, the investor needs all of the following except:

A) the know how to obtain an earnings estimate
B) the consideration of the accuracy of the earnings estimate obtained
C) the risk premium for the stock being examined
D) an understanding of the role of earnings surprises in impacting stock prices

Question 18

Other things being equal,

A) the higher the expected growth rate, the lower the P/E ratio.
B) as the risk-free rate increases, the required rate declines.
C) as the required rate of return increases, the P/E ratio declines.
D) as the equity risk premium increases, the required rate of return will declines.

Question 19

In addition to calculating the required rate of return on a stock by the CAPM, analysts can use the risk premium approach where a risk premium is added onto the company's current bond yield. Typically this risk premium is equal to:

A) the current T-bill rate.
B) a range of values between 200-600 basis points.
C) equal to the market risk premium in the CAPM.
D) approximately 600 basis points.

Question 20

The intrinsic value of a stock is:

A) the current price of the stock.
B) also known as the justified price of a stock.
C) calculated using charts.
D) published in the Value Line Investment Survey on a regular basis.

Question 21

The auditor's report:

A) guarantees the accuracy of financial statements in an absolute sense.
B) guarantees the quality of the reported earnings.
C) certifies that the generally accepted accounting principles were consistently applied.
D) certifies that future financial performance will meet specified standards.

Question 22

The primary factor why P/E ratios vary among companies is:

A) P/E ratios vary over time.
B) P/E ratios vary with economic conditions.
C) investor expectations about the future growth in earnings.
D) P/E ratios are an unstable, random figure.

Question 23

If a firm's ROA and ROE are equal, it can be concluded that the firm is:

A) exhibiting constant growth year over year.
B) in need of capital and should issue more stock.
C) without debt in its capital structure.
D) too highly levered.

Question 24

The PEG ratio takes into account not only the P/E ratio of the stock but adjusts it for the effect of:

A) the Government influence on the economy.
B) changes in the GDP.
C) how stocks are affected by changes in GAAP.
D) Growth in the company's earnings.

Question 25

According to the dividend valuation model, stock prices decrease when the:

A) expected dividend increases.
B) required rate of return increases.
C) dividend growth rate increases.
D) required rate of return decreases.

Question 26

The belief that the intrinsic value of a stock is influenced by the performance of the company that issued the stock is called:

A) technical analysis.
B) industry analysis.
C) fundamental analysis.
D) economic analysis.

Question 27

High P/E stocks are generally associated with:

A) mature companies.
B) cyclical companies.
C) young fast-growing companies.
D) defensive companies.

Question 28

All of the following are commonly used indicators used to analyze a firm's debt situation, except:

A) asset coverage.
B) debt to equity ratio.
C) interest coverage.
D) pre-tax return on capital.

Question 29

The key item on the balance sheet for investors is the after-tax net income.

Question 30

The less sales per dollar of assets, the less efficient the firm.

Question 31

Time series analysis assumes the future will be similar to the past.

Question 32

Investors interested in buying stocks which report bad news and suffer a sharp decline should buy now before they rebound.

Question 33

The P/E ratio is a measure of the relative price of a stock.

Question 34

Other things being equal, as the risk-free rate increases, the required rate of return declines at a faster rate.

Question 35

ROE measures the amount of net income available to bondholders.

Question 36

Other things being equal, as k increases, the P/E is expected to decline.

Question 37

The higher the amount of debt financing, the higher the ROE, other things being equal.

Question 38

A favourable earnings surprise occurs when the forecasted earnings are greater than the actual earnings of a company.

Question 39

What are the five components of ROE?

Question 40

List four major categories of financial ratios that should be considered when analyzing the financial statements of companies. Briefly explain the purpose of each category.

Question 41

In the model P/E = (D₁ / E₁) / (k - g), the P/E should increase if the dividend payout rate increases, other things being the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to stay the same. What is likely to happen to the dividend growth rate and the required return?

Question 42

Find the P/E ratio of a stock with a ROE of 30 per cent, a book value per share of $5.00, and a current stock price of $30.

Question 43

Suppose the risk-free real rate of return is 4%, expected inflation is 2%, the expected return on the market is 10%, and a company has a beta of 1.2. The company has just paid a dividend of $1.00, on earnings of $3.00, and its ROE is 11%. The company's stock is presently trading at $30.00.

Question 44

Assume that a firm has an expected earnings of $3.00, and an expected year-end dividend of $1.50 (i.e., the expected payout ratio is 50 percent since D₁/E₁ = 1.50/3.00 = 0.50). Estimate the firm's P/E ratio if k_e = 14% and g = 6%, and intrinsic value.