Deck 7: Analysing Shares

Question 1

Kim has gathered the following information on a company. $$\begin{array} { l l } \hline \text { Sales } & \$ 640,000 \\\text { Dividends paid on } & \$ 18,000 \\\text { ordinary share } & \\\text { Net profit margin }&5 \% \\\text { Number of shares } &128,000\\\text { outstanding }\\\hline\end{array}$$ What is the amount of the earnings per share?

A) $0.28
B) $0.30
C) $0.14
D) $0.25

Answer 1

$0.25

Question 2

The consumer electronics sector would be most significantly affected by

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

Answer 2

D

Question 3

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

Answer 3

A

Question 4

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

A) Business equipment.
B) Defence.
C) Consumer durables.
D) Food and agriculture.

Question 5

Fundamental analysis involves the in- depth study of the

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

Question 6

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

Question 7

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

A) Mature growth.
B) Rapid expansion.
C) Initial development.
D) Stability or decline.

Question 8

Marco's just reported an EPS of $1.68 on revenues of $440 million. The company has 12 million shares outstanding. Total assets are $280 million, current liabilities equal $48 million, and long- term debt is $112 million. Net fixed assets are worth $230 million. Given this information, which one of the following statements is correct?

A) Marco's debt- equity ratio is 0.75.
B) Marco's net working capital is $2 million.
C) Marco's total asset turnover is 3.67.
D) Marco's current ratio is 1.75.

Question 9

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

Question 10

Increases in either interest rates or taxes tend to

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

Question 11

Which one of the following statements is correct?

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

Question 12

The government has an expansionary economic policy when it

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

Question 13

A company has 2 million shares outstanding. Annual sales are $26 million. The net profit margin is 8% and the dividend payout ratio is 40%. Currently the stock trades at $17.68 per share. Given this information, the company has a P/E ratio of

A) 17 and a dividend yield of 3.20%.
B) 17 and a dividend yield of 2.35%.
C) 16 and a dividend yield of 3.20%.
D) 16 and a dividend yield of 2.35%.

Question 14

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

Question 15

Rio Tinto's debt to equity ratio is .54 while David Jone's is .68. By comparing these ratios we can conclude

A) that David Jones is in danger of bankruptcy.
B) very little because the firm's are in different industries.
C) that Rio Tinto uses too little debt financing.
D) that David Jones uses too little equity financing.

Question 16

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

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

Question 17

On March 31, Adolpha, Inc. reported the following information on its financial statements. $\begin{array}{llcc} \text { Total current } &\$210,687 \\ \text { assets } &\\ \text {Total long- } &\$1,063,432\\ \text { term assets } &\\ \text { Total current } &\$337,609\\ \text {liabilities } &\\ \text { Total long- } &\$1,002,643\\ \text { term debt} &\\\end{array}$
What is the available net working capital for Adolpha, Inc.?

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

Question 18

Generally, the market price of a share is

A) below its book value.
B) equal to its par value.
C) equal to its book value.
D) above its book value.

Question 19

Cash flow from operations

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

Question 20

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) 11.5%.
C) 18.3%.
D) 7.1%.

Question 21

Which one of the following is a leverage measure?

A) Return on equity.
B) Net profit margin.
C) Times interest earned.
D) Net working capital.

Question 22

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

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

Question 23

If a firm has an ROA of 10% and an ROE of 10%, then the

A) firm must have enough cash on hand to pay some extra dividends.
B) firm is losing money.
C) operating results of the firm are improving.
D) firm has no financial leverage.

Question 24

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

Question 25

JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ's share is currently selling for

A) $17.07 per share.
B) $18.00 per share.
C) $16.74 per share.
D) $19.35 per share.

Question 26

Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of

A) 8%.
B) 12%.
C) 4%.
D) 6%.

Question 27

On September 30, the Simpson Company reported the following information on its financial statements. $$\begin{array} { l l } \hline \text { Total current } & \$ 650,000 \\\text { assets } & \\\text { Total long- } & \$ 1,080,000 \\\text { term assets } & \\\text { Total current } &\$684,000\\\text { liabilities }\\\text { Total long- }& \$ 803,000 \\\text { term debt }\\\hline\end{array}$$ What is the amount of the shareholders' equity in the Simpson Company?

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

Question 28

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

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

Question 29

A comparison of a firm's current financial ratios to those of prior years allows one to

A) see trends that are developing.
B) accurately predict the future performance of a firm.
C) see how a firm's performance compares to that of a competitor.
D) determine if the firm is performing better than the overall industry.

Question 30

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

A) Exports.
B) Imports.
C) Retailing.
D) Automotive.

Question 31

For most companies, the dividend payout ratio falls within the range of

A) 60 to 80%.
B) 20 to 40%.
C) 10 to 20%.
D) 40 to 60%.

Question 32

Which one of the following statements is true?

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

Question 33

If a company's ROA is high, then an investor can assume that the company

A) is in danger of defaulting on its loans.
B) has more equity than debt in its capital structure.
C) is profitable.
D) pays a high dividend.

Question 34

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

A) Initial development.
B) Mature growth.
C) Rapid expansion.
D) Stability or decline.

Question 35

Worcester Corporation has a P/E ratio of 15. Natick Corporation is in the same industry as Worcester, but has a P/E ratio of 20. Possible interpretations of this discrepancy include

A) Natick corporation has higher earnings per share.
B) Worcester corporation is overpriced.
C) Investors expect Natick to grow faster than Worcester.
D) Natick's share price is higher than Worcester's.

Question 36

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

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

Question 37

A total asset turnover of 3 means that every

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

Question 38

Investors are most interested in which one of the following ratios?

A) Current ratio.
B) Net profit margin.
C) Return on equity.
D) Return on assets.

Question 39

On December 31, the Gold Standard Company reported the following information on its financial statements. $$\begin{array} { l l } \hline \text { Total current } & \$ 680,000 \\\text { assets } & \\\text { Total long- } & \$ 1,850,000 \\\text { term assets } & \\\text { Total current } &\$490,000\\\text { liabilities }\\\text { Total long- }& \$ 975,000 \\\text { term debt }\\\hline\end{array}$$ According to this information, the company's current ratio is approximately

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

Question 40

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

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

Question 41

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

Question 42

The PEG ratio

A) compares the price/earnings ratio to the rate of growth of the company's earnings.
B) measures the ability of a firm's assets to generate growth for the firm.
C) preferred by investors is equal to 2.0 or higher.
D) is a measure of a firm's liquidity.

Question 43

Nadine Enterprises has total assets of $240,000, a debt- equity ratio of 0.60, and a return on assets of 9%. What is the return on equity?

A) 5.6%
B) 14.4%
C) 15.0%
D) 5.4%

Question 44

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

Question 45

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 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

For their last fiscal year, the Short Company reported the following information. $$\begin{array} { l l } \hline \text { Accounts } & \$ 160,000 \\\text { Receivable } & \\\text { Inventory } & \$ 204,000 \\\text { Sales } & \$ 1,168,000 \\\text { Cost of } & \$ 724,000 \\\text { Goods Sold } & \\\hline\end{array}$$ What is the accounts receivables turnover rate?

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

Question 55

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

Question 56

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

Question 57

Top- down security analysis

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

Question 58

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

A) Net income before taxes.
B) EBITDA.
C) Income from operating activities.
D) Core earnings.

Question 59

Historical comparisons will reveal whether a company's performance is improving or deteriorating.

Question 60

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) Productivity average.
B) Gross domestic product.
C) Money supply.
D) Industrial production index.

Question 61

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

Question 62

A company's ratios are more meaningful when compared to other companies in the same industry.

Question 63

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

Question 64

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 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

The debt to equity ratio should be approximately the same across all industrial sectors.

Question 76

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

Question 77

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

Question 78

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

Question 79

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

Question 80

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