Question 1

What affect(s) the market price of common stock shares?

Accepted Answer

All the options - changes in international tensions, economy-wide factors, specific industry factors, and changes in exchange rates - can affect the market price of common stock shares. International tensions can affect the global economy and thus the stock market. Economy-wide factors like inflation, interest rates, and GDP growth can affect corporate earnings and therefore stock prices. Specific industry factors like technological innovation or regulatory changes can affect the stock prices of companies in those industries. Changes in exchange rates can affect the competitiveness of multinational corporations and thereby affect their stock prices.

Question 2

Most individuals prefer _____ to _____ and they will want a _____ expected return if they purchase common stock shares than if they invest in a certificate of deposit.

Accepted Answer

Most individuals prefer less risk to more risk and thus require a higher expected return for riskier investments like common stocks compared to safer investments like certificates of deposit.

Question 3

An analyst examines changes in a firm's ratios over the three-year period-a so-called cross-section analysis.

Accepted Answer

A cross-section analysis involves comparing different companies or entities at a single point in time, while examining changes in ratios over time is known as a trend analysis.

Question 4

The typical steps in financial statement analysis and valuation include all of the following, except

Accepted Answer

While obtaining reports from other financial analysts can be helpful in gaining additional insights, it is not a typical step in financial statement analysis and valuation. The other steps listed, including identifying industry characteristics, calculating profitability and risk ratios, preparing projected financial statements, and ultimately valuing the firm, are all standard components of this process.

Question 5

Ratios provide little information unless the analyst places them in a context.After calculating the ratios, the analyst must compare them with some standard.Which of the following is/are possible standard(s)?

Accepted Answer

All of the choices provided are possible standards for comparison. The planned ratio for the period helps determine if the company is meeting its goals. Comparison with the corresponding ratio during the preceding period helps determine if there has been any improvement or deterioration. Comparison with the corresponding ratio for a similar firm in the same industry provides insights into how the company is performing relative to its peers. Comparison with the average ratio for other firms in the same industry provides a broader context for the analysis. Therefore, all of these options are possible standards for comparison.

Question 6

Most financial statement analysis explores some aspect of a firm's

Accepted Answer

Financial statement analysis can explore both profitability and risk, or even both at the same time. It may also consider other factors such as liquidity, efficiency, and sustainability, which all contribute to the overall value of a company. Therefore, options A, B, and C are too narrow, and option E is irrelevant to financial statement analysis.

Question 7

Ratios provide little information unless the analyst places them in a context.After calculating the ratios, the analyst must compare them with some standard.Which of the following is not a possible standard?

Accepted Answer

Ratios are compared to historical data, industry averages, or planned targets to assess performance. Future ratios (succeeding period) cannot serve as a standard for current analysis because they are unknown at the time of comparison.

Question 8

The typical first step in financial statement analysis and valuation (after selecting assumptions) is:

Accepted Answer

Understanding the purpose and content of the principal financial statements and related notes is the first step in financial statement analysis and valuation as it helps in identifying the information needed, determining the relevance and reliability of the information, and understanding the limitations of the information. This step is crucial in ensuring that the analysis and valuation are based on accurate and relevant information.

Question 9

Analysts use measures of long-term liquidity risk to evaluate a firm's ability to meet interest and principal payments on long-term debt and similar obligations as they come due.If a firm cannot make the payments on time, it becomes insolvent and may have to reorganize or liquidate.

Accepted Answer

This statement is true as analysts do use measures of long-term liquidity risk to assess a company's ability to make payments on long-term debts and obligations, and failure to do so can lead to insolvency and the need for restructuring or liquidation.

Question 10

The following ratio relates the results of operating performance to the investments (assets) of a firm without regard to how the firm financed those investments. $\frac{\text { Net Income + Interest Expense Net of Income Tax Savings}}{\text {Average Total Assets }}$

The ratio is called a rate of return on:

Accepted Answer

This ratio is known as the rate of return on assets (ROA). It measures how efficiently a company uses its assets to generate profit, without considering the financing structure (equity vs. debt). The inclusion of "Interest Expense Net of Income Tax Savings" in the numerator allows for a focus on operational performance by neutralizing the effect of financing costs.

Question 11

Analysis of the Return on Assets has particular relevance to the

Accepted Answer

Return on Assets (ROA) is a measure of a company's profitability, indicating how efficiently it is using its assets to generate profits. As such, it is of particular interest to lenders and investors who want to assess the company's ability to generate returns on their investments. Other stakeholders such as employees, lower-level managers, government regulators, and unions may also be interested in ROA, but it is not as relevant to them as it is to lenders.

Question 12

As a practical matter, most firms report segment information by _____ indicating that most firms appear to be organized on these same lines.

Accepted Answer

According to the statement, most firms report segment information by products and services, indicating that they are organized on these same lines.

Question 13

Which of the following is/are limitations of ratio analysis?

Accepted Answer

All of the listed options are limitations of ratio analysis. The use of acquisition cost instead of current replacement cost or net realizable value can result in misleading ratios. The latitude firms have in selecting accounting principles can also lead to varying ratios. Changes in many ratios can correlate with each other, making it challenging to interpret them in isolation. Finally, to accurately compare the size of a ratio between periods for the same firm, one must recognize any conditions that have changed between those periods.

Question 14

Measures of profitability for a firm engaging in operations selling merchandise in its stores to generate net income do not include:

Accepted Answer

The inventory turnover ratio is a measure of a firm's efficiency in managing its inventory, but it is not a measure of profitability. The other options are all measures of profitability for a firm selling merchandise in its stores.

Question 15

The return from investing in the shares of common stock include(s):

Accepted Answer

The return from investing in the shares of common stock includes both the change in the market price of the common stock and cash dividends. Interest income is not a return from investing in common stock but rather from fixed-income securities such as bonds. Therefore, the best choice is D, which includes both a and b - change in the market price of the common stock and cash dividends.

Question 16

The typical last step in financial statement analysis and valuation (after selecting assumptions) is:

Accepted Answer

The last step in financial statement analysis and valuation is to value the firm using various methods such as discounted cash flow analysis, comparable company analysis, or precedent transaction analysis. This step involves estimating the intrinsic value of the company and determining whether the stock is undervalued or overvalued.

Question 17

The value of common stock investments will likely change between the time the shares are purchased and the time in the future when they are sold.The difference between the eventual selling price and the purchase price, is often called

Accepted Answer

The difference between the eventual selling price and the purchase price of common stocks is often called price appreciation if the difference is positive, or price depreciation if the difference is negative. Therefore, option D is the correct choice. Option A, B, C, and E are not accurate descriptions of this concept.

Question 18

The rate of return on assets relates the results of operating performance to the investments of a firm without regard to how the firm financed those investments.The ratio is calculated as follows:

Accepted Answer

The correct formula for the rate of return on assets includes both Net Income and Interest Expense net of income tax savings, divided by Average Total Assets, to account for the performance over a period rather than a single point in time.

Question 19

Many analysts use a common-size balance sheet, which expresses each balance sheet item as a percentage of total assets.

Accepted Answer

This statement is true. A common-size balance sheet is a tool used by analysts to better understand the composition of a company's assets and liabilities. By expressing each item as a percentage of total assets, analysts can identify trends and patterns in the company's financial position over time.

Question 20

The typical steps in financial statement analysis and valuation include(s):

Accepted Answer

All the mentioned steps are typical in financial statement analysis and valuation. These steps include valuing the firm, identifying industry economic characteristics and the firm's strategy, calculating and interpreting profitability and risk ratios, and preparing pro forma or projected financial statements.

Quiz 7: Introduction to Financial Statement Analysis