Deck 15: Company Analysis

Question 1

Which of the following is shown on the balance sheet on a lower of cost or market value basis?

A) Cash
B) Stockholders' equity
C) Marketable securities
D) Treasury stock

Answer 1

C

Question 2

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

A) It is part of stockholders' equity.
B) It represents spendable funds for a company.
C) It designates that part of previous earnings not paid out as dividends.
D) It is irrelevant in security valuation.

Answer 2

B

Question 3

The generally accepted accounting principles (GAAP) require that EPS be calculated using a:

A) conservative treatment.
B) liberal treatment.
C) standard set of rules developed by the accounting profession.
D) standard set of rules developed by the SEC.

Answer 3

C

Question 4

On a company's balance sheet, shareholder's equity is measured in:

A) book value.
B) market value.
C) current value.
D) non-depreciated value.

Question 5

Which of the following represents an estimate of the rate at which a company can grow from internal sources?

A) Return on assets
B) Sustainable growth rate
C) Adjusted EPS
D) Return on equity

Question 6

When analyzing stocks, the variable of interest to most investors is:

A) beta.
B) profit margins.
C) dividend yield.
D) earnings per share.

Question 7

The last step in top-down fundamental analysis is to:

A) analyze individual industries.
B) analyze individual companies.
C) analyze individual securities.
D) perform technical analysis.

Question 8

The two components of EPS are:

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

Question 9

Which of the following is not one of the relative valuation multipliers used in fundamental analysis?

A) P/E ratio
B) P/S ratio
C) P/M ratio
D) P/B ratio

Question 10

Earnings derived under GAAP and shown on the income statement are known as:

A) reported earnings.
B) certified earnings.
C) audited earnings.
D) verified earnings.

Question 11

Fixed assets consist of:

A) cash and marketable securities.
B) property, plant, and equipment.
C) intangible assets, like goodwill.
D) shareholders' equity.

Question 12

The auditor's report:

A) guarantees accuracy of the financial statements.
B) guarantees the quality of the earnings.
C) attests that the statements are a fair presentation of financial position.
D) includes a recommendation on the stock.

Question 13

The key item for investors on the income statement is:

A) sales.
B) interest expense.
C) cost of goods sold.
D) net income from continuing operations.

Question 14

EPS are of higher quality if:

A) the company is a blue chip.
B) the auditor's reputation is high.
C) they were derived using conservative principles.
D) FASB has approved them.

Question 15

Which statement about the quality of reported EPS is false?

A) Earnings quality assessments are difficult to make and require considerable expertise in accounting and financial analysis.
B) Reported EPS is not the precise figure that it first appears to be.
C) It is necessary to make adjustments to reported EPS figures when making cross-sectional comparisons.
D) Quality of earnings is generally consistent among companies in the same industry.

Question 16

Which of the following mandated that firms must submit an annual report to the SEC outlining the effectiveness of their internal accounting controls?

A) SEC Amendments Act
B) SIPC
C) Glass-Stegall Act
D) Sarbanes-Oxley Act

Question 17

Which of the following approaches best indicates how EPS should be computed? Take after-tax net income and divide by:

A) current common shares outstanding.
B) previous years common shares outstanding.
C) treasury shares outstanding.
D) average common shares outstanding.

Question 18

One way to calculate EPS is:

A) ROA x book value per share.
B) ROE x book value per share.
C) ROA ÷ book value per share.
D) ROE ÷ book value per share.

Question 19

Which of the following is not one of the parts of the cash flow statement?

A) Cash flow from operating activities
B) Cash flow from sales activities
C) Cash flow from investing activities
E) Cash flow from financing activities

Question 20

The two components of ROE are:

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

Question 21

A firm's sustainable growth rate can be calculated as the product of:

A) return on assets and the return on equity.
B) dividend payout ratio and leverage.
C) retention rate and the return on equity.
D) net profit margin and asset turnover.

Question 22

Low P/E stocks are generally associated with:

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

Question 23

Other things equal, if the:

A) required return increases, the P/E ratio will rise.
B) risk premium increases, the P/E ratio will rise.
C) risk-free rate rises, the P/E ratio will fall.
D) dividend payout increases, the P/E ratio will fall.

Question 24

In modern investment analysis, the market risk of a stock is measured by its:

A) beta.
B) standard deviation.
C) leverage.
D) coefficient of variation.

Question 25

Which of the following is true regarding earnings forecasts made by analysts versus forecasts made by statistical models? The evidence tends to:

A) support analysts' forecasts in terms of accuracy over statistical models.
B) support statistical models' forecasts in terms of accuracy over analysts' forecasts.
C) support both types of forecasts equally.
D) not support either type of forecast in terms of accuracy.

Question 26

Which of the following methods of security analysis involves the use of a computer program to imitate the brain?

A) Decision trees
B) Program trading
C) Day traders
D) Neural networks

Question 27

Which of the following is true regarding earnings estimates?

A) Management at most firms updates estimates monthly
B) Analysts typically rely on the estimates provided by management
C) Some firms have chosen not to provide estimates of earnings
D) Most analysts arrive at very similar estimates of earnings

Question 28

In what portion of the statement of cash flows would an investor look to find whether a firm had repurchased common shares?

A) Cash flows from operating activities
B) Cash flows from investing activities
C) Cash flows from financing activities
D) Cash flows from trading activities

Question 29

The balance sheet shows a corporation's portfolio of assets and:

A) its liabilities, over an accounting period.
B) its labilities, at a moment in time.
C) its liabilities and owner's equity, over an accounting period.
D) its liabilities and owner's equity, at a moment in time.

Question 30

ROA is the product of:

A) net income margin and asset turnover.
B) book value and asset turnover.
C) leverage and book value.
D) net income margin and leverage.

Question 31

The investment advisory service best known for evaluating mutual funds is:

A) Standard & Poor's.
B) Moody's.
C) Morningstar.
D) Value Line Investment Survey.

Question 32

How would you explain P/E ratio differences among companies? By differences in investor:

A) expectations about the future growth of the market.
B) estimates of the recent growth of earnings.
C) expectations about the future growth of earnings.
D) estimates about the recent growth of dividends.

Question 33

Which of the following would be found in the "cash flows from investing activities" portion of a firm's statement of cash flows?

A) Changes in accounts receivable
B) Depreciation
C) Net borrowings
D) Capital expenditures

Question 34

Other things equal, if the:

A) expected growth rate increases, the P/E ratio will decline.
B) risk-free rate rises, the required rate will decline.
C) required rate rises, the P/E ratio will decline.
D) risk premium rises, the required rate will decline.

Question 35

Which of the following is not true regarding earnings estimates?

A) Some companies provide guidance on forthcoming earnings announcements.
B) The guidance number plays a major role in the consensus estimate.
C) The variance of actual reported earnings from the consensus had typically constituted the "whisper" forecast.
D) All of the above are true.

Question 36

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

A) losing money.
B) liquid enough to pay some extra dividends.
C) financed by all equity.
D) financed by a high proportion of debt.

Question 37

If the dividend growth rate increases for a firm, its P/E should:

A) increase.
B) stay the same.
C) decrease.
D) increase or decrease depending how it relates to economic growth.

Question 38

If business risk decreases for Megabucks, Inc., its P/E should:

A) increase.
B) stay the same.
C) decrease.
D) increase or decrease depending on the level of interest rates.

Question 39

The cash flow statement consists of the following parts:

A) cash holdings from revenue, operations, investing, and financing activities.
B) cash flows from revenue, operations, investing, and financing activities.
C) cash holdings from operations, investing, and financing activities.
D) cash flows from operations, investing, and financing activities.

Question 40

Which of the following statements is true?

A) Asset turnover is not related to ROA
B) Leverage affects EPS
C) ROA is a function of asset turnover and leverage
D) EPS is solely a function of ROE

Question 41

International Financial Reporting Standards (IFRS) are used by most countries.

Question 42

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

Question 43

It is necessary to determine a point estimate of the intrinsic value of a stock when using relative valuation techniques.

Question 44

EBITDA, sometimes called operating profit, is often emphasized by biotech companies because of their lack of real profitability.

Question 45

Which of the following would increase a firm's current calculated FCFF?

A) An increase in net borrowings
B) A decrease in net borrowings
C) An increase in fixed capital investment
D) A decrease in fixed capital investment

Question 46

The P/E ratio can be expected to change as the expected dividend payout ratio changes.

Question 47

An investor applying a growth at a reasonable price (GARP) investment strategy, would most likely select stocks with relatively:

A) high P/B ratios.
B) low P/B ratios.
C) high PEG ratios.
D) low PEG ratios.

Question 48

Some companies, tend to provide low guidance, contributing toward consistently positive earnings surprises.

Question 49

Firm ABC and Firm XYZ both have ROEs of 18%; however, Firm ABC has a much higher ROA than Firm XYZ. Which of the following do we know to be true? Relative to Firm ABC, Firm XYZ has a higher:

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

Question 50

Firm ABC and Firm XYZ both have ROAs of 12%; however, Firm ABC has a much higher ROE than Firm XYZ. Which of the following do we know to be true? Relative to Firm ABC, Firm XYZ has a lower:

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

Question 51

Garner Inc. and Tanex Corp. are competitors in the equipment manufacturing industry. Garner has a P/S ratio of 3.2, whereas Tanex has a P/S ratio of 1.8. Which of the following best justifies the difference in P/S ratios between the two firms? Relative to Garner, Tanex has a:

A) higher total asset turnover.
B) lower beta.
C) lower net profit margin.
D) lower total asset turnover.

Question 52

Since extraordinary items affecting earnings are typically non-recurring, investors should disregard their impact on earnings when evaluating the stock.

Question 53

Which of the following would increase a firm's PEG ratio?

A) An increase in the firm's P/E
B) A decrease in the firm's net profit margin
C) An increase in the firm's growth
D) A decrease in the firm's fixed capital investment

Question 54

In future periods, YZX Inc. is expected to maintain a dividend payout ratio of 40%, a net profit margin of 4.6%, a total asset turnover of 2.2, and an equity multiplier of 1.35. What is YZX's projected sustainable growth rate?

A) 5.46%
B) 8.20%
C) 8.55%
D) 9.00%

Question 55

The auditor's report guarantees the accuracy of reported earnings.

Question 56

To estimate the intrinsic value of a firm, investors could use the dividend discount model to estimate intrinsic value, or an earnings multiplier model based on a forecast of next year's EPS and what is thought to be an appropriate P/E ratio.

Question 57

Free cash flow represents money left after all the bills are paid and dividend
payments are made.

Question 58

Investors interested in buying stocks that report bad news and suffer a sharp decline should buy the first day bad news is reported.

Question 59

If a company's net income margin decreases, a company can maintain its ROA by increasing its asset turnover.

Question 60

Leverage can magnify returns to the stockholders but also increase potential losses to the stockholders.

Question 61

Investors following a GARP strategy prefer stocks with higher PEG ratios.

Question 62

In investments, "dead money" refers to past investments in assets that are recorded as retained earnings on the balance sheet.

Question 63

What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Question 64

When an investor buys a share of common stock the investor buys a claim of ownership. How is this claim represented on the balance sheet?

Question 65

Can an investor who wants to use the approach of projected earnings and P/Es find help in Value Line?

Question 66

What is the internal (sustainable) growth rate? How is it calculated?

Question 67

What are "earnings surprises?" How do they affect stock prices?

Question 68

A company with a return on equity (ROE) that equals its required return on equity has a justifiable P/B equal to 1.

Question 69

Should an investor seek companies with low P/Es or high P/Es?

Question 70

How could unexpected inflation affect the P/E ratio?

Question 71

Some analysts believe that the P/E ratio of a fairly-valued company will equal its expected growth rate.

Question 72

Do stock prices increase when companies announce earnings above the consensus forecast? Explain why or why not.

Question 73

How accurate are professional earnings estimates? Do purely mechanical models give better results than analysts who add subjective assessment to the data?

Question 74

What three variables affect the P/E ratio? How does each affect it?

Question 75

In the model P/E = (D₁/E₁)/(k - g), the P/E should increase if the dividend payout ratio increases, other things the same. If the payout ratio 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 76

Regardless of how closely a company adheres to good accounting practices and auditors do their job, investors need to examine "Notes to the Financial Statements" on 10-K and 10-Q Reports to understand the company's financial situation.

Question 77

All else the same, firms with higher net profit margins should have higher P/S ratios.

Question 78

Positive earnings surprises generally outnumber negative surprises.

Question 79

Other things being equal, as k rises, the P/E ratio will also rise.

Question 80

What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?