Deck 7: Analyzing Common Stocks

Question 1

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.

Answer 1

B

Question 2

The basic motivation of security analysis is to help investors

A)identify the best times to buy and sell securities.
B)contribute to the efficiency of securities markets.
C)identify securities whose intrinsic values are at or near their market values.
D)identify mispriced stocks.

Answer 2

D

Question 3

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

Answer 3

True

Question 4

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

Question 5

Company analysis is only concerned with how a company has performed in the past.

Question 6

The top down approach to security analysis starts with top management and then examines production and marketing strategies.

Question 7

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

Question 8

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

Question 9

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 10

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 11

The normal sequence in performing top down analysis is

A)competition, consumer demand, threat of substitute products.
B)market conditions, risk, company fundamentals.
C)economy, industry, company.
D)profitability, efficiency, liquidity.

Question 12

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 13

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

Question 14

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

Question 15

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 16

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

Question 17

Economic analysis is concerned with how the general state of the economy will impact the performance of a particular company within a particular industry.

Question 18

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

Question 19

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 20

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

Question 21

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 22

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 23

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 start to rise before the end of a recession.
D)Changes in stock prices generally lag changes in the economy.

Question 24

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

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

Question 25

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

Question 26

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

Question 27

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

Question 28

Interest rates and stock prices tend to rise and fall together.

Question 29

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

Question 30

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

Question 31

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 32

Which of the following is most likely to increase in value as the result of a weakening dollar?

A)an ADR for a foreign telecommunications company
B)stock in a firm that depends heavily on imported raw materials
C)stock in a firm with many accounts payable in foreign currencies
D)stock in a foreign company that depends heavily on exports to the U.S.

Question 33

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

Question 34

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 35

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

Question 36

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

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

Question 37

Which of the following are characteristics of an expansionary fiscal policy?
I.Increased government spending on infrastructure projects.
II.Reduction in defense and education budgets.
III.Reduction in employment taxes.
IV.Reduction in government borrowing.

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

Question 38

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 39

Rising corporate profits 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 40

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 41

The statement of cash flows is less influenced than the income statement by choices of accounting methods.

Question 42

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

Question 43

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 44

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 45

The consumer electronics industry would be most significantly affected by

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

Question 46

Well managed companies rarely reach the decline stage because

A)the world's population is growing.
B)they continuously develop new products to meet the needs of changing markets.
C)consumers remain loyal to established brands.
D)all of the above.

Question 47

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 48

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

Question 49

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 50

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

Question 51

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

Question 52

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

Question 53

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 54

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

Question 55

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 56

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

Question 57

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 58

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

Question 59

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

Question 60

Industry analysis focuses on the amount spent on research and development by individual companies within the industry.

Question 61

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

Question 62

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

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

Question 63

Calculating the times interest earned ratio using EBITDA is more conservative than using EBIT because it takes the cost of replacing fixed assets into consideration.

Question 64

Which of the following are considered in the ratio analysis of a firm?
I.profitability
II.market share
III.liquidity
IV.leverage

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

Question 65

The PEG ratio divides the stock's current price by the growth rate of earnings over the preceding 12 months.

Question 66

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 67

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 68

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 69

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

Question 70

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 71

Briefly describe fundamental analysis and the basic assumption behind it.

Question 72

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

Question 73

The quick ratio differs from the current current ratio in that accounts receivable are excluded from current assets.

Question 74

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 75

Cash flow from operations includes all of the following adjustments to net income EXCEPT

A)purchases of new equipment.
B)depreciation.
C)increase or decrease in current liabilities.
D)increase or decrease in current inventory.

Question 76

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 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

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

Question 79

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 80

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