Question 1

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

Accepted Answer

IFRS are adopted by over 140 countries, making them the most widely used accounting standards globally.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

Relative valuation techniques involve comparing a stock's valuation metrics to those of similar companies, rather than determining an intrinsic value.

Question 4

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

Accepted Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often highlighted by biotech companies as it excludes non-cash expenses and provides a clearer picture of operational performance, especially when actual net profits are not yet realized.

Question 5

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

Accepted Answer

A decrease in fixed capital investment would increase the firm's Free Cash Flow to the Firm (FCFF) as it reduces the cash outflows related to capital expenditures.

Question 6

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

Accepted Answer

The P/E ratio is influenced by the expected growth rate of earnings, which can be affected by changes in the dividend payout ratio. A higher payout ratio might imply lower retained earnings for growth, potentially affecting future earnings and thus the P/E ratio.

Question 7

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

Accepted Answer

GARP investors look for stocks with low PEG ratios, which indicate that the stock is undervalued relative to its growth potential.

Question 8

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

Accepted Answer

Some companies may provide conservative earnings guidance to manage investor expectations, making it easier to exceed those expectations and report positive earnings surprises.

Question 9

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:

Accepted Answer

A higher ROA with the same ROE indicates that Firm ABC uses less leverage, meaning Firm XYZ must have a higher debt ratio.

Question 10

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:

Accepted Answer

Firm XYZ has a lower debt ratio compared to Firm ABC. ROE is influenced by the company's use of leverage; a higher ROE with the same ROA suggests that Firm ABC uses more debt financing, leading to a higher debt ratio.

Question 11

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:

Accepted Answer

A lower net profit margin for Tanex suggests it is less efficient at converting sales into profits compared to Garner, justifying a lower P/S ratio.

Question 12

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

Accepted Answer

The answer of Since extraordinary items affecting earnings are typically...

Question 13

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

Accepted Answer

The PEG ratio is calculated as the P/E ratio divided by the growth rate of earnings. An increase in the P/E ratio would increase the PEG ratio, assuming the growth rate remains constant.

Question 14

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?

Accepted Answer

The answer of In future periods, YZX Inc. is expected...

Question 15

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

Accepted Answer

The auditor's report provides reasonable assurance that the financial statements are free from material misstatement, but it does not guarantee absolute accuracy.

Question 16

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.

Accepted Answer

The dividend discount model and the earnings multiplier model are both methods used to estimate a firm's intrinsic value, focusing on dividends and earnings respectively.

Question 17

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

Accepted Answer

Free cash flow is the cash left over after a company has paid all of its expenses, including dividends.

Question 18

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

Accepted Answer

Buying stocks immediately after bad news is reported can be risky as the stock may continue to decline. It's often better to wait for the market to stabilize and assess the company's long-term prospects.

Question 19

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

Accepted Answer

A decrease in net income margin can be offset by an increase in asset turnover to maintain the Return on Assets (ROA), as ROA is the product of net income margin and asset turnover.

Question 20

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

Accepted Answer

Leverage involves using borrowed funds to increase investment exposure, which can amplify both gains and losses.

Quiz 15: Company Analysis