Deck 7: Analyzing Common Stocks

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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 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

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 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

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 11

Economic analysis would consider such factors as

A) interest rates, unemployment, foreign exchange rates, inflation.
B) profitability and efficiency.
C) the effect of economic conditions on specific industries such as housing or automobiles.
D) industry response to demand for specific products.

Question 12

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.

Question 13

Some companies may actually thrive in a weak economy.

Question 14

Advocates of the efficient market hypothesis would argue that it is very unlikely that any in individual can consistently outperform the market.

Question 15

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 16

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

Question 17

The best time to buy stock is often in the late stages of an economic downturn.

Question 18

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 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

Interest rates and stock prices tend to move in opposite directions.

Question 28

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 29

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 30

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

Question 31

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

A) a retail firm that sells only domestic made products
B) a firm that buys 55% of its inputs from Japan
C) a firm that sells 85% of its product to buyers in other countries
D) a financial planner

Question 32

Products such as laundry detergent and toothpaste are locked in the mature growth stage.

Question 33

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

Question 34

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) Increasing money supply.
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 35

Which of these factors can affect stock prices?

A) contract the level of economic activity
B) falling interest rates
C) lower the rate of inflation
D) All of these factors can affect stock prices.

Question 36

Which of the following tends 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 37

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 38

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

A) a retail firm that sells only domestic made products
B) a firm that buys 55% of its inputs from Japan
C) a firm that sells 85% of its product to buyers in other countries
D) a hair stylist

Question 39

The rapid expansion stage stage of an industry usually continues for many years.

Question 40

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 41

The times interest earned ratio is calculated by dividing net income by interest expense.

Question 42

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

Question 43

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

Question 44

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 45

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 46

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

Question 47

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

Question 48

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 49

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

Question 50

Which of the following industries best fits the definition of "rapid growth industry"?

A) Alternative energy (wind & solar) as it replaces fossil fuels.
B) Automotive as sales of SUVs and light trucks grow at the expense of sedans.
C) Pharmaceuticals as an aging population uses more medicines.
D) Retail as online shopping becomes more popular at the expense of brick and mortar stores.

Question 51

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

Question 52

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 53

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

Question 54

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 55

What type of investor will be most attracted to industries in the mature growth stage?

A) Aggressive investors seeking capital gains.
B) Income oriented retirees.
C) Speculative investors hoping to discover "the next big thing."
D) Investors seeking to minimize their tax burden.

Question 56

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 57

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 58

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

Question 59

The income statement is one indicator of how well a company has done against its competitors.

Question 60

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

Question 61

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 62

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 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

Advanced Computing Inc. 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 $32.40 per share, it has a price/earnings ratio of 12.

Question 65

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 66

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

Question 67

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

Question 68

Which one of the following statements concerning accounting reports is correct?

A) Assets on the balance sheet are valued at historical cost less accumulated depreciation.
B) The investing activities section of the cash flow statement is primarily concerned with the firm's ownership of stocks and bonds issued by other companies.
C) Negative numbers for net investing activities and net financing activities indicate that a company is at risk for bankruptcy.
D) The income statement reflects the amount of cash available for investment and financing activities.

Question 69

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

Question 70

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

Question 71

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

Question 72

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

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

Question 73

Briefly describe fundamental analysis and the basic assumption behind it.

Question 74

The higher the debt-equity ratio, the greater the difference between return on assets and return on equity.

Question 75

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

Question 76

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 77

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

Question 78

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 79

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

Question 80

On June 30, the Simpson Company reported the following information on its balance sheet. $$\begin{array} { l r } \hline\text { Total current assets } & \$ 550,000 \\\text { Total long-ter } \mathrm { m } \text { assets } & \$ 1,120,000 \\\text { Total cur rent liabilities } & \$ 484,000 \\\text { Total long-ter } \mathrm { m } \text { debt } & \$ 705,000 \\\hline\end{array}$$ What is the amount of the stockholder's equity in the Simpson Company?

A) $481,000
B) $636,000
C) $965,000
D) There is not enough information to calculate stockholders' equity.