Deck 12: Macroanalysis and Microvaluation of the Stock Market

Question 1

It is more important to estimate future earnings than the future earnings multiplier.

Answer 1

False

Question 2

The best known monetary variable is the level of taxes.

Answer 2

False

Question 3

Coincident indicators include economic time series that have peaks and troughs that roughly occur at the same time as the peaks and troughs of overall economic activity.

Answer 3

True

Question 4

Estimating net profit margin directly is difficult because it is so volatile.

Question 5

Diffusion indexes indicate the spread in interest rates between major economies.

Question 6

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

Question 7

An analysis of U.S. equity markets using the cash flow techniques concludes that the market is not fully valued.

Question 8

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

Question 9

It is important to analyze the economies and security markets before analyzing alternative industries or companies.

Question 10

There is a negative relationship between the capacity utilization rate and the profit margin.

Question 11

The Goldman Sach analysis recommends an allocation of equity investments among countries in comparison to the country's normal weighting based on its relative market value.

Question 12

An increase in the required rate of return k will increase the P/E ratio.

Question 13

Recent studies show that money supply changes have an important impact on stock price movements.

Question 14

Recent studies indicate that one can earn excess returns in the stock market by forecasting unanticipated changes in the money supply.

Question 15

The first step in the Goldman Sachs analysis of world markets examines a country's aggregate economy and its components that relate to the valuation of securities.

Question 16

A main limitation of the NBER indicator series is false signals.

Question 17

Over the last 20 years, increases in the return on equity for the S&P Index has been associated with decreases in return of assets.

Question 18

Leading indicators of the business cycle include economic series that reach peaks or troughs before the peaks and troughs of the overall economy.

Question 19

The economic factor assumed to be closely related to stock prices is productivity.

Question 20

Stock prices move coincidentally with the economy.

Question 21

An increase in the retention ratio will cause a decrease in the growth rate.

Question 22

The U.S. balance of payments, the federal deficit and military contract awards are ____ of aggregate economic activity.

A)Leading indicators
B)Coincident indicators
C)Lagging indicators
D)Not categorized indicators
E)Not indicators

Question 23

Dividend growth is positively related to the return on equity.

Question 24

The index of leading indicators includes all of the following, except:

A)M2 money supply.
B)S & P 500 index.
C)Orders for plant and equipment.
D)Changes in the sensitive materials price.
E)Index of industrial production.

Question 25

The University of Michigan Consumer Sentiment Index is an example of a leading indicator.

Question 26

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

Question 27

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

Question 28

Changes in the dividend payout ratio are positively related to changes in the retention rate.

Question 29

The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods.

Question 30

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

Question 31

In well developed economies, markets are not affected by changes in expected inflation.

Question 32

Future tax rates are difficult to estimate because they are politically influenced.

Question 33

Which of the following series does not include the long-leading index?

A)Dow Jones Industrial Average
B)Dow Jones Bond Prices, Percent Face Value
C)Price to Unit Labor Cost
D)M2 Money Supply, Deflated
E)New Building Permits

Question 34

The valuation techniques presented in the chapter can only be applied to the stock market in the United States, since the U.S. stock market is inefficient.

Question 35

One of the economic series included in the National Bureau of Economic Research (NBER) coincident indicator is the index of industrial production.

Question 36

Which of the following variables was considered not significant in explaining stock returns?

A)Industrial production
B)Changes in the risk premium
C)Consumption
D)Twists in the yield curve
E)Inflation

Question 37

When estimating a major stock market value using the earnings multiplier approach near-term estimates of the required rate of return and growth rate are essential due to the impact of near-term events on cash flows.

Question 38

Which of the following are not cyclical indicators?

A)Selected series
B)Coincident indicators
C)Diffusion indicators
D)Leading indicators
E)Lagging indicators

Question 39

Building permits for new private housing units are listed as a leading indicator by the National Bureau of Economic Research (NBER).

Question 40

Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging indicator in the National Bureau of Economic Research (NBER).

Question 41

Which of the following is not a reason given for why forecaster are so often incorrect?

A)There is a temptation for economic forecasters to stay fairly close to the "norm," that is, "group think."
B)Many analysts are simply too short-sighted.
C)Economists and economic forecaster often suffer from information overload.
D)Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.
E)None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 42

Which of the following economic series are included in the NBER lagging indicator series?

A)Vendor Performance.
B)Index of industrial production.
C)Manufacturing and trade sales data in 1992 dollars.
D)Manufacturers' new orders, non-defense capital goods.
E)Average duration of unemployment in weeks.

Question 43

There are three techniques available to help an investor make a market decision. Which of the following is not such an analysis technique?

A)Macro techniques that are based on the strong relationship between the economy and security markets.
B)Micro techniques that estimate future market values by applying one of several basic valuation models to equity markets.
C)Technical analysis where an investor analyzes past and recent market movements for indications of future performance.
D)Fundamental analysis that considers the effect of market on the entire portfolio.
E)None of the above (that is, all are techniques available to make market decisions)

Question 44

If interest rates rise due to inflation, and expected cash flows to a firm rise, then you would expect stock prices to

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

Question 45

Aggregate return on equity increases as

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

Question 46

Expected earnings per share estimates requires all of the following except

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 47

Which of the following statements concerning asset allocation is false?

A)Diversification across international boundaries can improve risk-adjusted portfolio returns.
B)Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.
C)Severe currency blockages should not impact global diversification selections.
D)Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.
E)None of the above (that is, all statements are true).

Question 48

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

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 49

An examination of the relationship between stock prices and the economy has shown that the relationship is

A)Weak, and that stock prices turn after the economy does.
B)Nonexistent.
C)Strong, and that stock prices turn after the economy does.
D)Strong, and that stock prices turn before the economy does.
E)Weak, and that stock prices turn before the economy does.

Question 50

The correlation of stock market returns between the U.S. and Japan is ____ and ____.

A)High, increasing.
B)High, decreasing.
C)Low, increasing.
D)Low, decreasing.
E)Low, remaining constant.

Question 51

Which of the following is not an analytical measure used by the NBER to examine behavior within a series?

A)Diffusion indexes
B)Rates of change
C)Direction of change
D)Ratios among series
E)Comparison with previous cycles

Question 52

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

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

Question 53

Excess liquidity is defined as

A)The year-to year percentage change in the M2 money supply less the year-to-year percentage change in the nominal GNP.
B)The growth rate in M2 money supply less the growth rate in M1 money supply.
C)The year-to-year percentage change in the M1 money supply less the year-to-year percentage.
D)The year-to-year percentage change in the "real" GNP less the year-to-year percentage change in the nominal GNP.
E)None of the above

Question 54

Which of the following economic series are included in the NBER coincident indicator group?

A)Employees on nonagricultural payrolls.
B)Change in consumer price index for services.
C)Index of consumer expectations.
D)Spread of 10-year Treasury yield less fed funds.
E)Index of stock prices.

Question 55

The National Bureau of Economic Research (NBER) has derived the following indicator series in order to monitor business cycles.

A)M2, leading, and lagging.
B)Leading, coincident, and consumer expectations.
C)Leading, coincident, and lagging.
D)Leading, coincident, and M2.
E)Consumer expectations, leading, and lagging.

Question 56

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

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

Question 57

Which of the following is not a factor under the Free Cash Flow to Equity (FCFE) Model?

A)Depreciation expense
B)Capital expenditure
C)Change in working capital
D)Principal debt repayment
E)Earnings multiplier

Question 58

The initial effect of a change in monetary policy appears in ____ and only later in ____.

A)The aggregate economy, financial markets.
B)Financial markets, the aggregate economy.
C)Bond markets, stock markets,
D)Stock markets, bond markets.
E)None of the above.

Question 59

If a diffusion index for new orders went from 87 to 74 and then to 68, it would indicate ____ receipt of new orders and indicate a ____ in breadth and the possibility of a future ____ in the series.

A)Limited, strengthening, decline
B)Limited, weakening, increase
C)Widespread, strengthening, increase
D)Widespread, weakening, decline
E)Widespread, weakening, increase

Question 60

Which of the following is not normally associated with cyclical indicators?

A)The Securities and Exchange Commission (SEC)
B)The National Bureau of Economic Research (NBER)
C)Business Week
D)Center for International Business Cycle Research (CIBCR)
E)All of the above

Question 61

You are attempting to estimate expected earnings per share for a major stock market series. You have determined an appropriate estimate for sales per share. Which of the following methods can be used to estimate the profit margin?

A)Base the estimate on recent trends of net profit margins.
B)Estimate the net before tax (NBT) profit margin along with a tax estimate.
C)Incorporate an estimate an operating profit margin, defined as earnings before interest, taxes, and depreciation.
D)All of the above methods are appropriate.
E)None of the above methods are appropriate.

Question 62

The multiplier approach for estimating the intrinsic market value of a major stock market series requires the following step(s):

A)Estimating the future earnings per share for the stock market series
B)Estimating the appropriate earnings multiplier for the stock market series
C)Estimating long-run required rates of return and growth rates
D)Both a and b
E)All of the above

Question 63

The growth rate will most likely increase if the:

A)Retention ratio decreases
B)Payout ratio decreases
C)Return on equity decreases
D)Net income increases
E)Both a and c

Question 64

Which of the following economic series is not included in the National Bureau of Economic Research (NBER) leading indicator group?

A)Average weekly initial claims for unemployment
B)Index of 500 consumer stock prices
C)Real money supply, M2
D)Index of industrial production
E)All of the above are included in the NBER leading indicator group

Question 65

Which of the following is not a determinant of the aggregate gross profit margin?

A)Unit labor costs of production
B)Rate of inflation
C)Unemployment rate
D)Level of foreign competition
E)Growth rate of M2 money supply

Question 66

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

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

Question 67

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

Question 68

Which of the following economic series is not included in the National Bureau of Economic Research (NBER) coincident economic indicator group?

A)Total value of commercial loans
B)Employees on nonagricultural payrolls
C)Personal income less transfer payments
D)Industrial production
E)Manufacturing and trade sales

Question 69

The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 13 percent, and the expected growth rate for dividends is 8 percent. Compute the current earnings multiple.

A)7
B)13
C)4.61
D)14.61
E)None of the above

Question 70

If, for the S&P Industrials Index, the profit margin was 0.20 and the equity turnover ratio was 13, the ROE would be:

A)0.026%
B)2.600%
C)6.500%
D)26.00%
E)65.00%

Question 71

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

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

Question 72

A microeconomic estimate of the market earnings multiple requires an estimate for which of the following variables?

A)Dividend payout ratio
B)Return on equity
C)Real RFR
D)All of the above
E)None of the above

Question 73

The dividend payout ratio for the aggregate market is 55 percent, the required rate of return is 15 percent, and the expected growth rate for dividends is 7 percent. Compute the current earnings multiple.

A)3.93
B)78.6
C)6.88
D)39.3
E)None of the above

Question 74

If, for the S&P Industrials Index, the profit margin was .25 and the equity turnover ratio was 12, the ROE would be:

A)0.83%
B)0.48%
C)3.00%
D)30.00%
E)48.00%

Question 75

When applying the earnings multiplier model all of the following will cause the required rate of return, k, to change except

A)Changes in the real risk free rate
B)Changes in the retention rate
C)Changes in the rate of inflation
D)Changes in the risk premium for common stock
E)All of the above changes will cause a change in the required rate of return

Question 76

All of the following factors affect the required rate of return except

A)The economy's risk free rate.
B)Corporate business risk.
C)Return on equity.
D)Country risk.
E)Expected rate of inflation.

Question 77

If, for the S&P Industrials Index, the profit margin was 0.30 and the equity turnover ratio was 11, the ROE would be:

A)0.033%
B)3.300%
C)33.00%
D)36.70%
E)333.00%

Question 78

Which of the following is not a major variable that affects the aggregate stock market earning multiplier in a country?

A)Required rate of return on common stock in the country
B)Expected growth rate of dividends for the stocks in the country
C)Composite dividend-payout ratio for common stocks in country
D)Composite debt to equity ratio for firms in the country
E)All of the above are major variables for a country's aggregate stock market earnings multiplier

Question 79

Which of the following economic series is not included in the National Bureau of Economic Research (NBER) lagging indicator group?

A)Average duration of unemployment
B)Ratio of manufacturing and trade inventories to sales
C)Number of employees on nonagricultural payrolls
D)Percentage change in the labor cost per unit of output in manufacturing
E)All of the above are included in the NBER lagging indicator group

Question 80

Unit labor costs, the rate of inflation, the level of foreign competition, and the capacity utilization rate were variables tested by Finkel and Tuttle as determinants of the

A)Balance of payments.
B)The exchange rate.
C)Aggregate operating profit margin.
D)Aggregate profit margin.
E)Aggregate cost margin.