Question 1

A technical analysis is the framework for analyzing a security in which you look at a firm's internal strengths and weaknesses and external opportunities and threats in order to gain an understanding of what the future holds for that firm and its stock.

Accepted Answer

Technical analysis is a method of analyzing securities based on historical price and volume data, as well as other market indicators, in order to predict future price movements. It does not typically involve looking at a firm's internal and external factors. Fundamental analysis is the framework for analyzing a security by examining its financial and economic fundamentals, including the factors listed in the statement.

Question 2

Your dad said that he was curious to know why there is so much fluctuation in the value of common stocks.In 1997 the prospects for Sun Industries became more uncertain and investors began to view it as a more risky investment than they had previously.To compensate for this added risk,investors increased their required rate of return on Sun Industries stock,resulting in a decline in its market value.This explains the factor of

Accepted Answer

The fluctuation in the value of common stocks can be attributed to various factors, including risk. As the prospects for a company become more uncertain, investors view it as a more risky investment, and therefore increase their required rate of return on the stock. This leads to a decline in the market value of the stock. Therefore, the factor that explains the fluctuation in the value of Sun Industries stock is risk and stock valuation.

Question 3

A SWOT analysis

Accepted Answer

A SWOT analysis is a tool that helps to identify the strengths, weaknesses, opportunities, and threats of a firm. By doing so, it provides a better understanding of the firm's capabilities and its strategies, which can help to determine whether those strategies are sustainable or not. Therefore, both option A and C are correct.

Question 4

Your father-in-law's stockbroker examines future earnings and dividends,the expected level of interest rates,and the firm's risk to provide a basis for buy-sell recommendations.This stockbroker uses the ________ approach to stock valuation.

Accepted Answer

The stockbroker is using fundamental analysis, which involves examining a company's financial and economic fundamentals to determine its intrinsic value, including factors such as earnings, dividends, interest rates, and risk. Financial statement analysis and earnings analysis are components of fundamental analysis, but the overall approach is focused on analyzing the underlying factors that drive a company's financial performance. The expectations method and "none of the above" are not accurate descriptions of the stockbroker's approach.

Question 5

For several years you have been using charts and computer programs to project trends in the stock market.You are engaging in what type of analysis?

Accepted Answer

The use of charts and computer programs to project trends in the stock market is a characteristic of technical analysis. Technical analysis involves the use of past price and volume data to identify patterns and trends in the market and make investment decisions based on them.

Question 6

The P/E ratio approach is a type of fundamental analysis.

Accepted Answer

The P/E ratio (Price-to-Earnings ratio) is one of the most commonly used metrics in fundamental analysis, which examines a company's financial and economic strength to determine its intrinsic value. P/E ratio compares a company's stock price to its earnings per share (EPS) and provides insight into the company's valuation and growth potential. Therefore, the P/E ratio approach belongs to the fundamental analysis category.

Question 7

You are considering purchasing one of two stocks.Stock A is expected to pay a $2.50 dividend,and has historically grown at 6%.Stock B is expected to pay a $3.00 dividend and has historically grown at 4%.Both are the same risk,and you desire to earn a 16% return.Which of the following is true?

Accepted Answer

The answer of You are considering purchasing one of two...

Question 8

The P/E ratio of a stock is 20,and its earnings per share is $5.25.What is the current selling price of the stock?

Accepted Answer

Price to earnings ratio (P/E ratio) = Price per share (PPS) / Earnings per share (EPS)
20 = PPS / 5.25
PPS = 20 x 5.25 = $105

Question 9

ComChip is a computer chip manufacturer.Its stock is selling at $50 per share and earnings are $2 per share.What is the stock's P/E ratio?

Accepted Answer

The P/E ratio is calculated by dividing the current market price of the stock by its earnings per share (EPS). In this case, $50 / $2 = 25, making the correct answer a P/E ratio of 25.00.

Question 10

Your friend has recommended that you purchase stock in company XYZ.It is expected to pay a $4 dividend,and has historically grown at 5%.If the required rate of return is 12%,what is the estimated value of a share of XYZ stock?

Accepted Answer

Using the dividend discount model, we can calculate the estimated value of the stock as follows:

Estimated stock price = (Next year's dividend / Required rate of return - Dividend growth rate)

Estimated stock price = ($4 / 0.12 - 0.05) = $57.14

Therefore, choice C is the correct answer.

Question 11

Louise Rogers knows that several factors affect the price of a share of common stock.The one that says there is an inverse relationship between interest rates and the value of a share of common stock is the ________ factor.

Accepted Answer

The factor that describes an inverse relationship between interest rates and the value of a share of common stock is the interest rates and stock valuation factor. This means that when interest rates increase, the value of a share of common stock decreases, and vice versa. The other factors listed (risk and stock valuation, earnings growth and stock valuation, interest rates and risk valuation, interest rates and earnings growth valuation) do not specifically describe this relationship.

Question 12

According to your text,there is very little validation in using technical analysis as an investing tool.

Accepted Answer

The text states that technical analysis has "very little empirical evidence" to support its effectiveness as an investing tool, indicating a lack of validation.

Question 13

A stock currently sells for $100 per share,and has earnings of $2.00 per share.What is the stock's P/E ratio?

Accepted Answer

The P/E ratio (Price-to-Earnings ratio) is calculated by dividing the market value per share by the earnings per share (EPS). In this case, $100 divided by $2.00 equals a P/E ratio of 50.00.

Question 14

A stock currently selling for $105 with estimated earnings per share of $5.25 would have a P/E ratio of

Accepted Answer

The P/E ratio can be calculated by dividing the stock price by the earnings per share. So in this case, P/E ratio = $105 ÷ $5.25 = 20.

Question 15

The ratio of the annual dividend to the market price of the stock is called the

Accepted Answer

The ratio of the annual dividend to the market price of the stock is called the dividend yield.

Question 16

You are considering the purchase of a stock with a current market price of $50.25 per share.It is expected to pay a dividend of $5.25 next year.Historically the stock has grown at 5%,and based on its risk,you desire to earn a 15% return.Which of the following is true?

Accepted Answer

To estimate the current price of the stock, we can use the dividend discount model (DDM). The DDM estimates the intrinsic value of a stock as the present value of its future dividend payments, discounted by an investor's required rate of return.

Using DDM, we can calculate the estimated price of the stock as follows:
Estimated Price = Dividend next year / (Required return - Dividend growth rate)
Estimated Price = $5.25 / (0.15 - 0.05) = $52.50

Since the estimated price of the stock is higher than the current market price of $50.25, the stock is undervalued according to our calculations. Therefore, we should buy the stock.

Question 17

Using the stock valuation formula calculate the value of a share of stock if it is expected to pay $5 in dividends,in addition the dividends are expected to grow at a rate of 4 percent forever,and the investor's required rate of return is 12 percent.

Accepted Answer

The stock valuation formula is:
Value of Stock = Dividend in the next period / (Required rate of return - Dividend growth rate)
Substituting the given values:
Value of Stock = $5 / (0.12 - 0.04)
Value of Stock = $5 / 0.08
Value of Stock = $62.50
Therefore, the value of a share of stock is $62.50.

Question 18

Using the stock valuation formula calculate the value of a share of stock if it is expected to pay $15 in dividends,in addition the dividends are expected to grow at a rate of 8 percent forever,and the investor's required rate of return is 10 percent.

Accepted Answer

The value of a share of stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a perpetually growing dividend), which is given by the formula: P = D / (r - g), where P is the price of the stock, D is the dividend, r is the required rate of return, and g is the growth rate of the dividend. Plugging in the values given: P = $15 / (0.10 - 0.08) = $15 / 0.02 = $750.

Question 19

ComChip is a computer chip manufacturer whose stock is selling at $50 per share.Next year's net earnings,minus the preferred stock dividends,is estimated to be $200,000.The company currently has 100,000 shares of common stock outstanding.What is the firm's P/E ratio?

Accepted Answer

To calculate the P/E ratio, we divide the market price per share by the earnings per share (EPS).
EPS = (Net earnings - Preferred stock dividends) / Number of outstanding shares

EPS = ($200,000 - 0) / 100,000 shares
EPS = $2.00

P/E ratio = Market price per share / EPS
P/E ratio = $50 / $2.00
P/E ratio = 25.00

Therefore, the correct answer is C) 25.00.

Question 20

When the market becomes too bullish,the average P/E ratio will fall.

Accepted Answer

When the market becomes too bullish, the demand for stocks increases, causing prices to rise. This can lead to an increase in the overall P/E ratio as investors become more optimistic about future earnings. Therefore, the average P/E ratio is more likely to rise than fall during a bullish market.

Quiz 12: Investing in Stocks