Deck 9: The Top-Down Approach to Market, Industry, and Company Analysis

Question 1

Earnings growth and dividend yield will be impacted by GDP growth.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

The best known monetary variable is the level of taxes.

Question 5

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

Question 6

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

Question 7

Stock prices move coincidentally with the economy.

Question 8

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.

Question 9

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

Question 10

Returns from the overall market (or an individual stock) can be thought of as a combination of three factors: earnings growth, multiple expansion (or contraction), and dividend yield.

Question 11

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

Question 12

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

Question 13

Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging indicator in the Conference Board.

Question 14

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

Question 15

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

Question 16

Building permits for new private housing units are listed as a leading indicator by the Conference Board.

Question 17

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

Question 18

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

Question 19

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

Question 20

One of the economic series included in the Conference Board coincident indicator is the index of industrial production.

Question 21

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

Question 22

Price-to-sales ratio is still considered the predominant firm valuation technique.

Question 23

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Question 24

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

Question 25

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 26

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

Question 27

In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).

Question 28

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

Question 29

The best-known measure of relative value for common stock is the P/E ratio.

Question 30

Dividend growth is positively related to the return on equity.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.

Question 36

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

Question 37

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Question 38

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 39

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

Question 40

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

Question 41

An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.

Question 42

Two major competitive strategies are low-cost leadership and low-price leadership.

Question 43

According to Peter Lynch, a favorable attribute of a firm that may result in favorable stock performance is when a firm's product is the latest craze.

Question 44

One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.

Question 45

To benefit from cost leadership, a firm must command prices near the industry average.

Question 46

Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.

Question 47

A growth company is one whose stock is undervalued by the market.

Question 48

An undervalued stock is a growth stock.

Question 49

A firm's competitive strategy can be either defensive or offensive.

Question 50

A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.

Question 51

A defensive company is one whose sales, earnings, and cash flows are strongly correlated with the business cycle.

Question 52

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

Question 53

According to Peter Lynch, a favorable attribute of a firm that may result in favorable stock performance is when a firm buys back its shares.

Question 54

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

Question 55

By definition growth companies have growth stocks.

Question 56

Underpriced stocks can be ranked using the excess return ratio, which is calculated as the Market price/Risk free rate.

Question 57

A stock with low systematic risk is considered to be a defensive stock.

Question 58

A cyclical stock's rate of return is not expected to decline during an overall market decline.

Question 59

Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.

Question 60

An overvalued stock is a non-growth stock.

Question 61

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 62

Which of the following economic series are included in the Conference Board 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 63

Which of the following economic series are included in the Conference Board 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 64

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) decline and then rise.

Question 65

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) stock markets, the aggregate economy

Question 66

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 the M2 money supply less the growth rate in the 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 these are correct.

Question 67

Which of the following are NOT cyclical indicators?

A) selected series
B) coincident indicators
C) diffusion indicators
D) leading indicators
E) lagging indicators

Question 68

Which of the following is NOT an analytical measure used by the Conference Board 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 69

Which of the following variables was NOT considered 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 70

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) rise and then decline.
D) decline.
E) decline and then rise.

Question 71

Which of the following economic series is NOT included in the Conference Board 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 these are correct (that is, all are included in the lagging indicator group).

Question 72

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 73

Which of the following economic series is NOT included in the Conference Board 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 these are correct (that is, all are included in the lagging indicator group).

Question 74

The Conference Board 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 M
E) consumer expectations, leading, and lagging

Question 75

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 76

Returns from the overall market (or an individual stock) can be thought of as a combination of which of the following factors?

A) earnings growth, multiple expansion, and dividend yield
B) earnings growth, multiple expansion, and annualized return
C) earnings growth, interest rates, and dividend yield
D) inflation, multiple contraction, and dividend yield
E) inflation, contraction, and annualized return

Question 77

Which of the following is NOT a reason given for why forecasters 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, as they try to include a number of ideas in their forecasts.
E) None of these are correct (that is, all are reasons cited for why forecasters are often incorrect).

Question 78

In 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) lot categorized indicators
E) lot indicators

Question 79

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 80

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

A) the Securities and Exchange Commission
B) the Conference Board
C) Business Week
D) Center for International Business Cycle Research
E) All of these are correct.