Deck 7: Analyzing Common Stocks

Question 1

Markets can only be efficient if many competent analysts are performing fundamental analysis.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Investors who believe that most securities are efficiently priced should not not be concerned with fundamental analysis.

Question 6

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

Question 7

Top-down security analysis

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

Question 8

Top-down security analysis begins with

A) an analysis of a company's top management.
B) determining an investment's risk and an appropriate discount rate.
C) an analysis of broad economic factors affecting the financial markets.
D) identifying specific industries that are likely to grow faster than the overall economy.

Question 9

The security analysis process should help investors to
I) purchase investments that are priced at or above their intrinsic value.
II) sell investments that are priced at or above their intrinsic value.
III) purchase investments that are priced at or below their intrinsic value.
IV) identify investments appropriate for their goals.

A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only

Question 10

An investment should offer an expected return commensurate with the risk involved.

Question 11

Advocates of the efficient market hypothesis would argue that it is virtually impossible for any investor to consistently outperform the market.

Question 12

The best time to buy stock is at the peak of an economic cycle.

Question 13

Fundamental analysis involves the in-depth study of the

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

Question 14

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 15

The intrinsic value of a security is based on the
I) amount of risk.
II) current market value of the security.
III) discount rate applicable to the security.
IV) estimated future cash flows from the security.

A) I and III only
B) III and IV only
C) I, II and III only
D) I, III and IV only

Question 16

Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of

A) fundamental analysis.
B) behavioral analysis.
C) the efficient market hypothesis.
D) technical analysis.

Question 17

The three steps in determining a stock's intrinsic value are
I) estimating the stock's future cash flows.
II) estimating the risk associated with future cash flows.
III) careful analysis of patterns in the stock's recent price history.
IV) estimating an appropriate discount rate to apply to future cash flows.

A) III and IV only
B) I, II and IV only
C) I, III and IV only

Question 18

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

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

Question 19

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

Question 20

Federal budget deficits tend to further depress an already depressed economy.

Question 21

In addition to company reports, Value Line also publishes industry analyses.

Question 22

Which of the following business es will be positively impacted by a weak dollar?

A) retailing
B) imports
C) exports
D) personal services

Question 23

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

Question 24

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

Question 25

Which of the following tend to increase security market prices?
I) an increase in industrial production
II) an increase in corporate profits
III) an increase in the federal deficit when the economy is strong
IV) an increase in interest rates

A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV

Question 26

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

Question 27

Economic factors such as a weak dollar will have a negative impact on all industrial sectors.

Question 28

Rising interest rates tend to

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

Question 29

The government has an expansionary economic policy when it

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

Question 30

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

Question 31

Which one of the following statements is correct?

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

Question 32

Which of the following tend to signal that stock prices are likely to rise in the future?
I) Employment increases after several months of recession.
II) Interest rates are low compared to the recent past.
III) Major market indexes have just reached record highs.
IV) Housing starts increase after several months of decline.

A) I and II only
B) II and III only
C) I, II and IV only
D) I, II, III and IV

Question 33

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

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

Question 34

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

Question 35

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) industrial production index
B) money supply
C) gross domestic product
D) productivity average

Question 36

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

Question 37

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

A) retailing
B) imports
C) exports
D) automotive

Question 38

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

A) business equipment
B) defense
C) food and agriculture
D) consumer durables

Question 39

Name at least three economic variables that the affect the stock market and describe their effects.

Question 40

Which one of the following is likely to have a negative effect on stock prices?

A) falling interest rates
B) a decrease in the money supply (M2)
C) low inflation
D) a decrease in the unemployment rate

Question 41

The rapid expansion phase of an industry is characterized by

A) extreme sensitivity to interest rates and other economic factors.
B) high returns and relatively low risks.
C) willingness of investors to buy almost any stock associated with the industry.
D) many decades of sustained above average growth.

Question 42

The balance sheet summarizes the company's operations over the last fiscal year.

Question 43

Briefly describe and discuss industry analysis and the motivation behind it.

Question 44

Which stage of an industry's growth cycle is interesting only for potentially high dividend payouts?

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

Question 45

For a company to remain in business for the long term, cash flow from investing activities and financing activities must generally be positive numbers.

Question 46

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

Question 47

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

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

Question 48

Positive cash flow from investing activities is typical of firms experiencing healthy growth.

Question 49

The statement of cash flows is used to assess a company's long-term solvency.

Question 50

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

Question 51

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

Question 52

Which of the following factors are considered when analyzing an industry?
I) the nature and conditions of governmental regulations
II) the involvement and relations, if any, with labor unions
III) the development of new technologies relevant to the industry
IV) the extent of competition within the industry

A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 53

List and explain the various stages of the growth cycle of an industry. Also discuss the merit of investing in the industry during each of the various stages.

Question 54

The consumer electronics would be most significantly affected by

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

Question 55

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

Question 56

Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to
I) be price leaders.
II) benefit more from economies of scale.
III) have better R&D programs.
IV) have lower production costs.

A) II and IV only.
B) I, II and IV only.
C) I, II and III only
D) I, II, III and IV

Question 57

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

Question 58

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

Question 59

Which of the following are considered in the company analysis phase of a fundamental analysis of a firm?
I) the composition and growth in sales
II) the capital structure of the firm
III) the outlook of the national economy
IV) the composition and liquidity of the company's assets

A) I and II only
B) I, II and IV only
C) II and IV only
D) I, II, III and IV

Question 60

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

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

Question 61

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

Question 62

Which of the following would be found on a company's income statement?
I) cost of goods sold
II) interest expense
III) cash flow from operations
IV) earnings before taxes

A) I an IV only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV

Question 63

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 64

On September 30, the Simpson Company reported the following information on its financial statements. What is the amount of the stockholder's equity in the Simpson Company?

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

Question 65

A low current ratio may reveal liquidity problems in a profitable company.

Question 66

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

Question 67

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

Question 68

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

A) operating expenses
B) EBIT
C) net income before taxes
D) EBITDA

Question 69

Briefly describe fundamental analysis and the basic assumption behind it.

Question 70

Which of the following accounting practices are potentially misleading or even fraudulent?
I) writing off goodwill as an extraordinary loss
II) using accrual rather than cash basis reporting
III) off-balance sheet liabilities
IV) recognizing revenues prematurely

A) I and II only
B) I, II and IV only
C) III and IV only
D) I, III and IV only

Question 71

Which of the following would be found on a company's balance sheet?
I) Accounts receivable
II) Interest expense
III) Property plant and equipment
IV) Total stockholders' equity

A) I an IV only
B) I, II and III only
C) I, II and IV only
D) I, III and IV only

Question 72

Return on equity (ROE) is computed by dividing net income by the market value of equity.

Question 73

Which of the following accounting practices are potentially misleading or even fraudulent?
I) writing off goodwill as an extraordinary loss
II) using accrual rather than cash basis reporting
III) off-balance sheet liabilities
IV) recognizing revenues prematurely

A) I and II only
B) I, II and IV only
C) III and IV only
D) I, III and IV only

Question 74

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

Question 75

Which of the following would be typical of a Statement of Cash Flows for a healthy firm in a sustainable business?

A) Cash flow from operations is negative, cash flows from investment activities and financing activities are positive.
B) Cash flow from operations , investment activities and financing activities must all be positive.
C) Cash flow from operations is positive, cash flows from investment activities and financing activities are negative.
D) If the Statement shows a net increase in cash, the source is unimportant.

Question 76

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

Question 77

A firm with a very low debt-equity ratio might be able to increase return on equity by taking on additional debt.

Question 78

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

Question 79

The fact that assets are recorded on the balance sheet at historical rather current values prevents the return on assets ratio (ROA) from being distorted by inflation.

Question 80

Cash flow from operations

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