Fundamentals Of Investing 13th Edition by Scott B. Smart – Test Bank A+

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6.1 Learning Goal 1

1) Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm’s assets.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

2) There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

3) Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3 consecutive years.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

4) For most stocks, the returns from dividend income far exceeds the return from capital gains.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

5) Between 1930 and 2014, the average return on stocks exceeded 10%.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

6) Between 1956 and 2011, approximately 30% of years had positive returns.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

7) In spite of major losses in 2008, by the end of 2014 stock prices, as measured by the S&P 500 index, were higher than their peak levels of 2007.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

8) Because common shareholders are entitled to the profits that remain after all of a corporation’s other obligations have been met, common shareholders are known as

1. A) residual owners.
2. B) temporary owners.
3. C) debt owners.
4. D) owners of last resort.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

9) If stocks earn an average rate of return of 12 %, their value doubles every

1. A) 4 years.
2. B) 6 years.
3. C) 8 years.
4. D) 12 years.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

10) Which one of the following statements about common stock is true?

1. A) Common stock can provide attractive capital appreciation opportunities.
2. B) Dividends generally provide the greatest rate of return on common stocks.
3. C) Common stocks generally have a negative rate of return over a ten-year period.
4. D) The DJIA is the best indicator of the overall performance of common stocks.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

11) Which of the following are benefits related to stock ownership?

1. ease of trading
2. attractive inflation-adjusted rates of return

III. guarantee of long-term positive returns

1. affordability

1. A) I and II only
2. B) II and IV only
3. C) I and III only
4. D) I, II and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

6.2 Learning Goal 2

1) A market correction is defined as a stock market decline of 10% or more.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

2) While many stocks increase in value over the long run, most of the return on stocks comes from dividends.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

3) It is not unusual for bear markets to occur two or more times in any given 10 year period.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

4) Over the long term, the capital gain on most stocks will exceed the dividend income.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

5) Although bear markets on average occur every 3 to 4 years, the timing of bear markets is very hard to predict.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

6) For stocks in the S&P 500 index, returns from dividends exceeded capital gains over the period 2000-2009.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

7) The period from late 2007 through the end of 2014 is best described as a prolonged bear market.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

8) For the period 2000 through 2009, the average annual price change for stocks in the S&P 500 index was

1. A) 16%.
2. B) 8%.
3. C) -1%.
4. D) -50%.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

9) The rate of return from dividends has been much higher in recent decades than it was in the 1930s and 40s.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

10) $10,000 invested in the S&P 500 in March 2009 would have grown to more than $20,000 by the end of 2014.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

11) When residential real estate values fell sharply from 2006 to 2009, the stocks of financial institutions were hardly impacted at all.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

12) Stocks generally have produced positive inflation-adjusted rates of return over the long-term.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

13) An individual stock generally provides a

1. A) dividend payment that ensures total protection from purchasing power risk.
2. B) refuge from event risk.
3. C) current income that is less predictable than that available from other types of investments.
4. D) predictable annual rate of return.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

14) From October 2007 to March 2009, stock prices as measured by the S&P 500 Index

1. A) nearly doubled in value.
2. B) lost more than half their value.
3. C) declined by nearly 10%.
4. D) rose by nearly 25%.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

15) From March 2009 to January 2012, stock prices as measured by the S&P 500 Index

1. A) more than doubled in value.
2. B) lost more than half their value.
3. C) declined by nearly 10%.
4. D) rose by nearly 25%.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

16) Which of the following periods provided particularly high returns to stock investors?

1. A) February 1972-October 1974
2. B) March 2009-December 2014
3. C) September 2000-September 2002
4. D) October 2007-March 2009

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

17) From 1976 through 2014, the dividend yield on stocks has been ________ the coupon yield on corporate bonds.

1. A) sometimes higher and sometimes lower than
2. B) on average, about the same as
3. C) consistently lower than
4. D) consistently higher than

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

18) The extraordinary run up in stock prices during the late 1990s primarily affected

1. A) energy stocks.
2. B) retail stocks.
3. C) pharmaceutical stocks.
4. D) technology stocks.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

19) Many companies increased their dividends

1. A) whenever necessary to compensate shareholders for declining stock values.
2. B) in every year since 1950.
3. C) during the market decline of 2007-2008.
4. D) during the market recovery of 2009-2011.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

20) Which of the following are true about stock market returns as measured by the S&P 500 index?

1. In 2008 alone stocks in the index lost approximately 36% of their value.
2. $10,000 invested in the index in March 2009 would have been worth more than $20,000 by the end of 2014.

III. From the beginning of 2000 to the end of 2010, the index more than doubled in value.

1. Both stock and real estate prices recovered recovered strongly in the period between early 2009 and late 2014.

1. A) I II and III only
2. B) II, III and IV only
3. C) I ,II and IV only
4. D) I, and IV only

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

21) Describe the bear market of 2008 through early 2009 and the trend of stock prices in subsequent years.

Answer: During the period 2008 through early 2009, stocks suffered some of their steepest declines in stock market history. From October 2007 to March of 2009, U.S. stocks lost half their value and the S&P 500 index declined by 36% in 2008 alone. Similar declines were experienced in all the world’s major markets. Stocks such as GE, that had increased dividends for years , had to cut their dividends. However during the 2009-2011 period stocks more than doubled in value and many corporations restored all or part of their dividend payments. The bull market continued through 2014 with only a few brief corrections. (The summer of 2015, however did see substantial declines in the major indexes.) Historically, stocks are quite risky and periodically subject to large declines, but patience is rewarded by higher rates of return than what is available from less volatile investments.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

6.3 Learning Goal 3

1) Shares of publicly traded stock can be issued either through a public offering or a rights offering.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

2) Companies typically issue new shares through an initial public offering (IPO).

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

3) Shareholders must either exercise their rights granted via a rights offering or let them expire unused.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

4) Corporations often split their stocks when they believe that the price makes them less attractive to average investors.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

5) The total value of an investor’s holdings in a company will increase as a direct result of a stock split.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

6) Stock held in treasury is a means of increasing the number of shares outstanding.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

7) Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

8) Different classes of stock generally have either different voting rights or different dividends.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

9) Electronic trading systems have increased transaction costs of odd-lot trades.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 3

10) Since each share of common stock represents ownership in a company, shares of common stock are often referred to as

1. A) illiquid investments.
2. B) equity securities.
3. C) fixed-income securities.
4. D) unit-cost securities.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

11) Which one of the following statements about common stock is correct?

1. A) Each share of stock has a specified maturity date.
2. B) Common stock gives stockholders first title to a share of the company’s earnings, prior to other corporate obligations.
3. C) Common stock typically provides higher levels of current income than do similar grade corporate bonds.
4. D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

12) Stocks that are readily available to the general public and that are bought and sold on the open market are known as

1. A) initial public offerings.
2. B) publicly traded issues.
3. C) treasury stocks.
4. D) blue chip stocks.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

13) When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a

1. A) public offering.
2. B) rights offering.
3. C) stock spin-off.
4. D) treasury offering.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

14) In a rights offering, the

1. A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position.
2. B) underwriter offers the investing public a certain number of shares at a certain price.
3. C) total equity remains constant while the number of shares of common stock outstanding increases.
4. D) amount of debt in the capital structure increases by the amount of the rights offering.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

15) Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own

1. A) 100 shares valued at about $27 a share.
2. B) 100 shares valued at about $3 a share.
3. C) 900 shares valued at about $27 a share.
4. D) 900 shares valued at about $3 a share.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

16) Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A shareholder who owned 1000 shares of stock prior to the split will now own

1. A) 400 shares valued at about $7.50 a share.
2. B) 40 shares valued at about $1.20 a share.
3. C) 250 shares valued at about $7.50 a share.
4. D) 250 shares valued at about $1.20 a share.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

17) When a corporation declares a stock split, it usually does so because

1. A) the firm’s retained earnings are excessive.
2. B) there are too many shares of stock outstanding.
3. C) investors sometimes require nontaxable returns.
4. D) it wants to make its stock more affordable to average investors.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

18) Stock which has been issued and subsequently reacquired by the issuing corporation is called

1. A) letter stock.
2. B) treasury stock.
3. C) classified stock.
4. D) book stock.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

19) Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned

1. A) 10,000 shares worth approximately $1.50 per share.
2. B) 10,000 shares worth approximately $0.15 per share.
3. C) 100 shares worth approximately $15 per share.
4. D) 100 shares worth approximately $1.50 per share.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

20) Which of the following is unlikely to be found in an internet stock quotation?

1. A) earning per share (EPS)
2. B) beta
3. C) previous day’s closing price
4. D) broker’s commission per 100 shares

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 3

21) What are the effects of a company repurchasing its own stock as Treasury shares?

1. A) usually negative in the short term but uncertain over the long term
2. B) usually positive in the short term but uncertain over the long term
3. C) usually positive in both the short term and the long term
4. D) no effect in either the short term or the long term

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

22) One motive for issuing classified stock with different voting rights is to

1. A) increase the market value of the company.
2. B) avoid SEC reporting requirements.
3. C) allow the company’s founders to retain control of the company.
4. D) facilitate the issue of additional shares in the future.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

23) Stock quotes on most Internet service providers such as Yahoo Finance include

1. the highest and lowest price over the last 52 weeks.
2. the closing price for the previous trading day.

III. the opening price for the day.

1. the bid price and ask price.

1. A) I and III only
2. B) II and IV only
3. C) I, II and III only
4. D) II, III and IV only

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

24) A round lot consists of

1. A) 1 share.
2. B) 10 shares.
3. C) 100 shares.
4. D) 1,000 shares.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

25) Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued

1. A) buy-back stock.
2. B) treasury stock.
3. C) OTC stock.
4. D) classified stock.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

26) Why do some companies split their stock?

Answer: A stock split reduces the number of shares outstanding while decreasing the price per share. Firms often declare splits when their stock is trading at a price which they consider to be too high to attract the types of investors they seek.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

6.4 Learning Goal 4

1) A stock’s market value would normally be higher than it’s book value.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

2) A stock’s book value and par value are normally the same or nearly the same.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 4

3) A stock can have only one market value, but different investment values for different investors.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

4) A stock’s investment value can be much higher than its book value.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

5) The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the Internet.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

6) If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company has a market capitalization of $50,000,000.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

7) Another term for the stated value or face value of a stock is its

1. A) book value.
2. B) liquidation value.
3. C) par value.
4. D) proxy value.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

8) The par or stated value of common stock is important for

1. A) accounting purposes only.
2. B) helping the investor determine the stock’s intrinsic value.
3. C) helping the board of directors determine the dividend payout.
4. D) helping the market determine the trading price of the stock.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

9) The balance sheet value of a firm’s assets minus the balance sheet amount of its liabilities is known as

1. A) par value.
2. B) book value.
3. C) liquidation value.
4. D) market value.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 4

10) If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company’s market capitalization is

1. A) $40,000,000.
2. B) $49,000,000.
3. C) $50,000,000.
4. D) $60,000,000.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

11) Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding, its book value per share would be

1. A) $32.33.
2. B) $33.60.
3. C) $43.20.
4. D) $52.80.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

12) As a general rule, which one of the following statements concerning the various values of common stock is correct?

1. A) Market values are usually below book values.
2. B) Par values are usually above book values.
3. C) Market values are usually below par values.
4. D) Book values are usually below market values.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

13) Which of the following will tend to increase transaction costs?

1. A) using a full service broker
2. B) buying or selling shares through an on-line broker
3. C) buying or selling more than 1000 shares in a single trade
4. D) buying or selling at times when volume is high and the exchanges are busy

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 4

14) The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge is

1. A) $144,000,000.
2. B) $154,000,000.
3. C) $4,000,000.
4. D) $72 million.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 4

15) You are given the following information on a company.

Which one of the following statements is correct based on the information provided?

1. A) The market price is $21.34 per share.
2. B) The investment value is $2.67 per share.
3. C) The par value is $2.67 per share.
4. D) The book value is $21.34 per share.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

16) The value that investors place on a stock is called its

1. A) book value.
2. B) investment value.
3. C) liquidation value.
4. D) par value.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

17) What is the relationship between a stock’s market value and its investment value?

Answer: A stock’s market value is its actual price at any given time; its investment value is what an investor thinks the stock is worth. If the investor thinks the investment value is higher than the market value, she should buy the stock. However, the market is value is a kind of consensus estimate of all investors who are willing to buy or sell at the current price, so it is unlikely that a stock’s investment value will be very far above or below its market value.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

6.5 Learning Goal 5

1) A company’s board of directors must declare a dividend if the firm is profitable.

Answer: FALSE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

2) Shareholders who sell their stock on or after the ex-dividend date, but before the date of record, will still receive the declared dividend.

Answer: TRUE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

3) High dividend yields are typical of rapidly growing companies.

Answer: FALSE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

4) Dividend payments are usually more stable than capital gains.

Answer: TRUE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 5

5) Stock dividends do not increase the value of a shareholder’s position.

Answer: TRUE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

6) Stock dividends and stock splits both increase the number of shares but add nothing to the value of the company.

Answer: TRUE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

7) Cash dividends are taxed at the same rate as ordinary income.

Answer: FALSE

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 5

8) The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76. What is the amount of dividends per share?

1. A) $0.03
2. B) $0.57
3. C) $1.03
4. D) $1.32

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

9) The decision of how much money to pay out in dividends is made by the

1. A) board of directors.
2. B) company shareholders.
3. C) chief executive officer.
4. D) chief financial officer.

Answer: A

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

10) Factors considered in making a decision on a firm’s dividend include the

1. cash position of the firm.
2. firm’s growth prospects.

III. the expectations of the shareholders.

1. minimum dividends required by law.

1. A) II and IV only
2. B) I, II and IV only
3. C) I, II and III only
4. D) I, II, III and IV

Answer: C

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

11) The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the

1. A) date of record.
2. B) ex-dividend date.
3. C) payment date.
4. D) purchase date.

Answer: A

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

12) The Limberger Corporation declared a quarterly dividend of $0.10 per share. The ex-dividend date was July 15, the date of record was July 18, and the payment date was July 28. If you had owned 100 shares of the Limberger Corporation and sold them on July 15, then

1. A) you would collect $10.00 in dividends, and the purchaser would not collect any dividends.
2. B) the purchaser would collect $10.00 in dividends, and you would not collect any dividends.
3. C) you would collect $5.00 in dividends, and the purchaser would collect $5.00 in dividends.
4. D) neither you nor the purchaser would collect any money in dividends.

Answer: A

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

13) The common shares of the Hiboux Ltd have a book value of $21.60 and a market value of $28.60. The company pays $0.28 in dividends each quarter. What is the dividend yield?

1. A) 1.0%
2. B) 1.3%
3. C) 3.9%
4. D) 5.2%

Answer: C

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

14) Since 2003, most dividends are taxed

1. A) at a higher rate than capital gains.
2. B) at a lower rate than capital gains.
3. C) at the same rate as ordinary income.
4. D) at the same rate as capital gains.

Answer: D

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

15) Since 2003, dividends have been taxed at the same rate as capital gains. As a result,

1. A) many companies have reduced the percentage of earnings paid out as dividends.
2. B) many companies have increased the percentage of earnings paid out as dividends.
3. C) tax rates have had little or no effect on dividend policies.
4. D) more companies have replaced dividends with stock repurchase plans.

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 5

16) Dividend yield is calculated by dividing

1. A) the market price of one share of stock by the annual dividend per share.
2. B) the annual dividend per share by the market price of one share of stock.
3. C) earnings per share by market price per share.
4. D) annual dividend per share by earnings per share.

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

17) If a corporation declares a 10% stock dividend, then

1. A) the share price of the stock will most likely decline by about 9%.
2. B) the share price of the stock will most likely increase by about 10%.
3. C) the share price of the stock will most likely remain unchanged.
4. D) each shareholder will get a 10% cash rebate off his or her next round lot purchase of the stock.

Answer: A

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

18) Gypsum Corp. pays out 25% of its earnings as dividends. Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44. What is the dividend yield?

1. A) 1.5%
2. B) 2.0%
3. C) 5.9%
4. D) 7.9%

Answer: A

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

19) Pilgrim Corp. stock currently sells for $25 per share? The annual dividend payment is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the dividend payout ratio is ________.

1. A) 12%; .4%
2. B) 8.33%; 25%
3. C) 4%; 33%
4. D) 33%; 4%.

Answer: C

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

20) Pilgrim Corp. stock currently sells for $25. The dividend yield is 4% and the dividend payout ratio is 25%. The dividend is ________ and the earnings per share are ________.

1. A) $3.00; $1.00
2. B) $1.00; $4.00
3. C) $.12; $1.00
4. D) $.25; $6.25

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

21) To take advantage of the opportunity to acquire additional shares of a company’s stock without incurring any brokerage commissions, many investors participate in

1. A) initial public offerings.
2. B) dividend reinvestment plans.
3. C) deferred equity securities.
4. D) corporate trusts.

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

22) Reinvested dividends

1. A) are taxed when the shares purchased with the reinvested dividend are sold.
2. B) are taxed at the time the dividend is paid.
3. C) do not increase the value of an investors holdings.
4. D) are generally sold at a premium over the market price.

Answer: B

Learning Outcome: F-22 Compare and contrast different types of payout policies

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 5

6.6 Learning Goal 6

1) Stocks which perform well in a faltering economy are called defensive stocks.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

2) Mid-cap stocks are generally classified as those with a market capitalization between $2 and $10 billion.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 6

3) “Baby blues” is a term used to refer to telecom stocks.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

4) A stock can be both a tech stock and a blue chip stock at the same time.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

5) So-called income stocks pay fixed dividends similar to interest on bonds.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

6) American Depositary Receipts (ADRs) are issued against shares of U.S. corporations and are traded on foreign security exchanges.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

7) American Depositary Receipts (ADRs) are denominated in U.S. dollars and traded on U.S. security exchanges. but track the performance of a foreign corporation.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 6

8) Over the period 1900 to 2014, U.S. stocks had the highest rate of return of any country.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 6

9) The rate of return on a foreign investment is affected by changes in the exchange rates.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

10) An increase in the value of the dollar relative to the yen has a positive effect on the returns of U.S. investors who invest in stocks of Japanese firms.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

11) An increase in the dollar relative to the euro has a negative effect on the returns of U.S. investors who invest in European firms.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

12) The most common reason for an investor to adopt the quality long-term growth investment strategy is for long-term accumulation of capital.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

13) The total-return approach concentrates solely on capital gains over the long term.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

14) Which one of the following is a characteristic of blue chip stocks?

1. A) guaranteed minimum annual dividend of $2 a share
2. B) annual dividends of more than $5 per share
3. C) long and stable dividend and earnings records
4. D) relatively high risk exposure

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

15) Investors seeking current income that tends to increase over time should purchase

1. A) corporate bonds.
2. B) income stocks.
3. C) growth stocks.
4. D) speculative stocks.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

16) Companies with strong earnings but limited growth opportunities

1. A) do not generally pay any dividends.
2. B) are called blue-chip stocks.
3. C) generally pay high dividends.
4. D) are speculative stocks.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

17) Characteristics of established growth companies include all of the following EXCEPT

1. A) high operating margins.
2. B) steady earnings growth.
3. C) adequate cash flow to service their debt.
4. D) high dividend payout ratios.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

18) Stocks whose prices are expected to remain stable, or even prosper, when economic activity is slowing down are known as

1. A) defensive stocks.
2. B) cyclical stocks.
3. C) growth stocks.
4. D) speculative stocks.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

19) Which of the following are typical characteristics of small cap stocks?

1. strong balance sheets
2. market cap less than $2 billion

III. potential for high returns along with high risk

1. potentially dramatic changes in their earnings

1. A) III and IV only
2. B) II and III only
3. C) I, III and IV only
4. D) II, III and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 6

20) Which of the following are characteristics of blue-chip stocks?

1. solid balance sheets
2. generous dividend yields

III. immunity from bear markets

1. some growth potential

1. A) III and IV only
2. B) II and III only
3. C) I, II and IV only
4. D) II, III and IV only

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

21) Stocks related to computers and the Internet are classified as

1. A) blue-chip stocks.
2. B) income stocks.
3. C) cyclical stocks.
4. D) tech stocks.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

22) Typical characteristics of growth stocks include

1. A) rapidly growing dividends.
2. B) high rates of growth in operations and earnings.
3. C) acquisitions of competing companies.
4. D) strong performance even in market downturns.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

23) Which of the following best fits the description “speculative stock”?

1. A) Sirius XM Radio
2. B) Facebook
3. C) Amazon
4. D) Apple

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 6

24) Which of the following best fits the description “defensive stock”?

1. A) Facebook
2. B) Walmart
3. C) Samsung
4. D) Tesla Motors

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Revised

Learning Goal: Learning Goal 6

25) Which of the following best fits the description “blue chip stock”?

1. A) Facebook
2. B) Under Armour
3. C) General Electric
4. D) Chipotle Mexican Grill

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

26) One characteristic of mid-cap stocks is that they

1. A) are generally new firms with high growth potential.
2. B) tend to be highly volatile.
3. C) are fairly good-sized companies that offer attractive return opportunities.
4. D) are traded primarily through pink sheet bids.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

27) Which category of stocks represents the highest level of risk?

1. A) large-cap
2. B) mid-cap
3. C) baby blue
4. D) small-cap

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

28) The U.S. stock market

1. A) currently represents about 66% of the world’s equity market.
2. B) consistently outperforms the foreign markets once exchange rates are considered.
3. C) is decreasing as a percentage of the world’s equity market.
4. D) lists over 25,000 stocks.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

29) Advantages of using American Depositary Receipts to participate in foreign markets include

1. lower transaction costs than for direct foreign stock purchases.
2. reduced exposure to foreign exchange risk.

III. dividends are paid in U.S. dollars.

1. quotations are readily available from U.S. sources such as Yahoo Finance or MSN Money.

1. A) I and II only
2. B) I and III only
3. C) I, II and III only
4. D) I, III and IV only.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: New Question

Learning Goal: Learning Goal 6

30) ADRs

1. are shares of U.S. companies traded on foreign exchanges.
2. are shares of foreign companies traded on U.S. exchanges.

III. pay dividends in U.S. dollars if they pay dividends.

1. are subject to exchange rate risk.

1. A) I and II only
2. B) II and III only
3. C) II. III and IV only
4. D) I, II, III and IV

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

31) Amanda purchased stock in a German firm at a price per share of 35 euros when the U.S. $/euro exchange rate was $1.20. After six months, Ann sold the stock for 37 euros when the U.S. $/euro exchange rate was $1.10. The stock does not pay a dividend. What is Ann’s rate of return on this investment?

1. A) 3.31%
2. B) -3.10%
3. C) 5.7%
4. D) 9.2%

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Revised

Learning Goal: Learning Goal 6

32) Aggressive stock management

1. A) requires holding speculative stocks for the long term.
2. B) involves active stock trading in the short-term in the quest for capital gains.
3. C) concentrates on the long-term growth aspects of a security.
4. D) concentrates on high dividend yielding stocks.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

33) Which of the following are advantages of the buy and hold strategy?

1. rapid accumulation of wealth
2. low transaction costs

III. capital gains taxed at the long-term rate

1. portfolio requires less time and energy to manage than for most other strategies

1. A) I and II only
2. B) II and III only
3. C) II, III and IV only
4. D) I, II, III and IV

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

34) Which one of the following investment strategies would NOT appeal to an investor who is most concerned with storage of value?

1. A) buy-and-hold
2. B) high income
3. C) quality long-term growth
4. D) speculation and short-term trading

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

35) The common stock investment strategy that is the most basic strategy and is popular with conservative, quality-conscious individuals looking for competitive returns over the long run is the

1. A) buy-and-hold strategy.
2. B) current income strategy.
3. C) growth strategy.
4. D) speculation and short-term trading strategy.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

36) Aggressive stock management focuses on the pursuit of

1. A) dividend income.
2. B) short-term capital gains.
3. C) long-term capital gains.
4. D) all of the above.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

37) Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment?

1. buy and hold
2. short-term trading

III. quality long-term growth

1. consistent dividend record

1. A) I and IV only
2. B) I and III only
3. C) I, II and III only
4. D) I, III and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

38) Which strategy applies to investors who fund long-term goals with high-quality stocks which they retain for the entire investment period?

1. A) quality long-term growth
2. B) buy and hold
3. C) speculation
4. D) current income

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

39) Income stocks are well suited for retirees because

1. A) dividend income is tax-free.
2. B) the capital gains are predictable.
3. C) dividend yields tend to exceed bond yields.
4. D) dividends tend to increase over time.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

40) Explain why every stock portfolio should include some defensive stocks.

Answer: Stocks generally move in direct correlation to the overall economy. Defensive stocks are the exception as they tend to remain relatively stable or even increase in value when the economy moves into a recession. Thus, defensive stocks offer good downside protection in a faltering economy and also provide the benefits of diversification.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 6

Fundamentals of Investing, 13e (Smart)

Chapter 7 Analyzing Common Stocks

7.1 Learning Goal 1

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 1

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 1

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 1

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

8) One of the basic premises of security analysis, and in particular fundamental analysis, is that

1. A) a stock’s price is based on its past cash flows rather than on anticipated future cash flows.
2. B) market sectors do not move in concert with business cycles.
3. C) all securities have an intrinsic value that their market value will approach over time.
4. D) a security’s risk has relatively little effect on the security’s return.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

9) The intrinsic value of a security is based on the

1. amount of risk.
2. current market value of the security.

III. discount rate applicable to the security.

1. estimated future cash flows from the security.

1. A) I and III only
2. B) III and IV only
3. C) I, II and III only
4. D) I, III and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

10) The three steps in determining a stock’s intrinsic value are

1. estimating the stock’s future cash flows.
2. estimating the risk associated with future cash flows.

III. careful analysis of patterns in the stock’s recent price history.

1. estimating an appropriate discount rate to apply to future cash flows.

1. A) II, III and IV only
2. B) I, II and IV only
3. C) I, III and IV only

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

11) The basic motivation of security analysis is to help investors

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

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 1

12) Top-down security analysis

1. A) starts with the fundamental analysis of a firm.
2. B) includes economic, industry, and fundamental analysis.
3. C) concentrates on the competency of the senior management of a firm.
4. D) centers on the past performance of a firm.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

13) The normal sequence in performing top down analysis is

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

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 1

14) Fundamental analysis involves the in-depth study of the

1. A) role of nondiversifiable risk in an investor’s portfolio.
2. B) financial condition and operating results of a given firm.
3. C) pattern of security prices as revealed in chart formations.
4. D) role of diversifiable risk in an investor’s portfolio.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

15) 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

1. A) fundamental analysis.
2. B) behavioral analysis.
3. C) the efficient market hypothesis.
4. D) technical analysis.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 1

7.2 Learning Goal 2

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

2) 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.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

9) Which measure of the business cycle represents the market value of all goods and services produced in a country over a twelve-month period?

1. A) industrial production index
2. B) money supply
3. C) gross domestic product
4. D) productivity average

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

10) Which one of the following is likely to have a negative effect on stock prices?

1. A) falling interest rates
2. B) a decrease in the money supply (M2)
3. C) low inflation
4. D) a decrease in the unemployment rate

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

11) The Federal Reserve through monetary policy can help expand the economy by

1. A) lowering income taxes on individuals.
2. B) reducing tariffs such that foreign exports can increase.
3. C) supporting a moderate growth of the money supply.
4. D) increasing government spending on the national infrastructure.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

12) Rising interest rates tend to

1. A) contract the level of economic activity.
2. B) increase the level of business investment.
3. C) indicate governmental expansion of the economy.
4. D) signal the trough of a recessionary market.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

13) The government has an expansionary economic policy when it

1. A) increases taxes.
2. B) increases government spending.
3. C) promotes rising interest rates.
4. D) limits exports of goods and services.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

14) Rising corporate profits are likely to have the greatest effect on which of the following industrial sectors?

1. A) business equipment
2. B) defense
3. C) food and agriculture
4. D) consumer durables

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

1. A) retailing
2. B) imports
3. C) exports
4. D) personal services

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

1. A) retailing
2. B) imports
3. C) exports
4. D) automotive

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

17) Which of the following tend to signal that stock prices are likely to rise in the future?

1. Employment increases after several months of recession.
2. Interest rates are low compared to the recent past.

III. Major market indexes have just reached record highs.

1. Housing starts increase after several months of decline.

1. A) I and II only
2. B) II and III only
3. C) I, II and IV only
4. D) I, II, III and IV

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

18) Which of the following are characteristics of an expansionary fiscal policy?

1. Increased government spending on infrastructure projects.
2. Reduction in defense and education budgets.

III. Reduction in employment taxes.

1. Reduction in government borrowing.

1. A) I and III only
2. B) II and III only
3. C) I, II and IV only
4. D) I, II, III and IV

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

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

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

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

20) Which one of the following statements is correct?

1. A) Stock prices are independent of the economic cycle.
2. B) Stock prices change simultaneously with the economy.
3. C) Stock prices are often start to rise before the end of a recession.
4. D) Changes in stock prices generally lag changes in the economy.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

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

Answer: Inflation: high inflation increases the rate at which cash flows from investments are discounted and therefore tends to lower their value. Inflation is also a major component of interest rates. Interest rates: in general rising interest have a negative effect on security prices and falling interest rates a positive effect.

Money supply: moderate growth in the money supply has a positive effect, but rapid growth can lead to inflation and higher interest rates, which would be negative. A contracting money supply is typical of recessions and depresses stock prices.

Exchange rates: a relatively weak dollar favors industries that are major exporters such as agriculture and construction equipment. A strong dollar favors importers and also reduces the possibility of inflation because imported goods are cheaper in dollar terms.

(Student answers will vary.)

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

7.3 Learning Goal 3

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 3

7) 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

1. be price leaders.
2. benefit more from economies of scale.

III. have better R&D programs.

1. have lower production costs.

1. A) II and IV only
2. B) I, II and IV only
3. C) I, II and III only
4. D) I, II, III and IV

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

8) The consumer electronics industry would be most significantly affected by

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

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

9) Which of the following factors are considered when analyzing an industry?

1. the nature and conditions of governmental regulations
2. the involvement and relations, if any, with labor unions

III. the development of new technologies relevant to the industry

1. the extent of competition within the industry

1. A) I, II and IV only
2. B) II, III and IV only
3. C) I, II and III only
4. D) I, II, III and IV

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

10) Which stage of an industry’s growth cycle is most influenced by economic events?

1. A) initial development
2. B) stability or decline
3. C) mature growth
4. D) rapid expansion

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

11) Which stage of an industry’s growth cycle is interesting only for potentially high dividend payouts?

1. A) initial development
2. B) stability or decline
3. C) mature growth
4. D) rapid expansion

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

12) The rapid expansion phase of an industry is characterized by

1. A) extreme sensitivity to interest rates and other economic factors.
2. B) high returns and relatively low risks.
3. C) willingness of investors to buy almost any stock associated with the industry.
4. D) many decades of sustained above average growth.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

13) Well managed companies rarely reach the decline stage because

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

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

14) Which stage of an industry’s growth cycle offers the greatest opportunity for an investor who is seeking capital gains?

1. A) initial development
2. B) mature growth
3. C) stability or decline
4. D) rapid expansion

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

15) 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.

Answer: The 4 stages of the growth cycle are

1. initial development stage—the industry is new and untried; investment opportunities are not available to most investors; risks are high;
2. rapid expansion stage—product acceptance is spreading and investors can foresee the industry’s future; economic variables don’t have a large effect on the industry’s performance; good time to invest in company;
3. mature growth—heavily influenced by economic development; expansion comes from the economy’s growth; may provide defensive, cyclical or current income types of investment opportunities;
4. stability or decline—demand for the industry’s products is diminishing; investment opportunities are few.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

Answer: Industry analysis

1. focuses on the activities of one of more industries.
2. looks at the competitive position of an industry in relation to other industries.
3. seeks answers to questions such as: How is the industry regulated? What role does labor play in the industry? What economic forces are especially important to the industry?
4. facilitates research by using published reports such as the S&P Industry Surveys.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 3

7.4 Learning Goal 4

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 4

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

7) The balance sheet summarizes the company’s operations over the last fiscal year.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

9) 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.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

10) Which of the following are considered in the ratio analysis of a firm?

1. profitability
2. market share

III. liquidity

1. leverage

1. A) I and II only
2. B) I, III and IV only
3. C) II and IV only
4. D) I, II, III and IV

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

11) Which of the following accounting practices are potentially misleading or even fraudulent?

1. writing off goodwill as an extraordinary loss
2. using accrual rather than cash basis reporting

III. off-balance sheet liabilities

1. recognizing revenues prematurely

1. A) I and II only
2. B) I, II and IV only
3. C) III and IV only
4. D) I, III and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

1. A) The income statement reflects the position of a firm as of a single point in time.
2. B) The total equity of a firm is equal to the total assets plus the total liabilities.
3. C) The statement of cash flows identifies both the sources and the uses of cash.
4. D) The income statement reflects the amount of cash available for investment and financing activities.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

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

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 4

14) Which of the following would be typical of a Statement of Cash Flows for a healthy firm in a sustainable business?

1. A) Cash flow from operations is negative, cash flows from investment activities and financing activities are positive.
2. B) Cash flow from operations , investment activities and financing activities must all be positive.
3. C) Cash flow from operations is positive, cash flows from investment activities and financing activities are negative.
4. D) If the Statement shows a net increase in cash, the source is unimportant.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

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

1. A) operating expenses
2. B) EBIT
3. C) net income before taxes
4. D) EBITDA

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

16) Which of the following would be found on a company’s income statement?

1. cost of goods sold
2. interest expense

III. cash flow from operations

1. earnings before taxes

1. A) I an IV only
2. B) I, II and III only
3. C) I, II and IV only
4. D) I, II, III and IV

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

17) Which of the following would be found on a company’s balance sheet?

1. Accounts receivable
2. Interest expense

III. Property plant and equipment

1. Total stockholders’ equity

1. A) I an IV only
2. B) I, II and III only
3. C) I, II and IV only
4. D) I, III and IV only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

18) 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?

1. A) $243,000
2. B) $277,000
3. C) $927,000
4. D) $3,217,000

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

19) Briefly describe fundamental analysis and the basic assumption behind it.

Answer:

1. rests on the belief that the value of a stock is influenced by the performance of the company that issued the stock.
2. studies the financial condition and operating results of a firm.
3. uses financial ratios to understand relationships.
4. compares current ratios to historical and industry standards.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

7.5 Learning Goal 5

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

2) Financial ratios can reveal a lot about a company’s liquidity, activity, and profitability.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

4) Return on assets is a very important analytical tool because it measures how effectively management is using a firm’s assets to generate profits.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

7) 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.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

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

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

12) If a firm has an equity multiplier of 3, this means that the firm has $3 in equity for every $1 in long-term debt.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

13) Return on equity can be expressed mathematically as “(net profit margin)(total asset turnover)(equity multiplier).”

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

14) A high P/E ratio may be an indication that a stock is overpriced.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

15) A high PEG ratio implies a high growth rate in earnings relative to the stock’s price.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

16) When comparing companies in the same industry but of different sizes, net profit margin is more meaningful than net profit as a dollar amount.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

17) Which of the following are measures of liquidity?

1. net working capital
2. accounts receivable turnover

III. current ratio

1. times interest earned

1. A) I and III only
2. B) I, II and III only
3. C) I, II and IV only
4. D) I, III and IV only

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

18) Financial ratios

1. allow comparisons across firms without concern over firm size.
2. can compare a firm’s operating and financial status to industry norms.

III. provide insights into a companies future.

1. look at the liquidity, activity, leverage, profitability and market measures of a firm.

1. A) II and IV only
2. B) I and II only
3. C) I, II and IV only
4. D) I, II, III and IV

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Revised

Learning Goal: Learning Goal 4

19) On December 31, the Gold Standard Company reported the following information on its financial statements.

According to this information, the company’s current ratio is approximately

1. A) 1.39.
2. B) 1.68.
3. C) 1.73.
4. D) 1.90.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

20) To determine whether a company is using leverage effectively, an analyst should consider

1. A) the current ratio and net working capital.
2. B) inventory, accounts receivable and total asset turnover ratios.
3. C) the debt to equity and times interest earned ratios.
4. D) ROA and the net profit margin.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

21) A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets?

1. A) 3.6%
2. B) 4.5%
3. C) 8.1%
4. D) 9.0%

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

22) A company has sales of $640,000, net profit after taxes of $23,000, a total asset turnover of 4.17 and an equity multiplier of 1.67. What is the return on equity?

1. A) 24%
2. B) 9.0%
3. C) 8.1%
4. D) 4.5%

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

23) Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear

1. A) more leveraged.
2. B) less leveraged.
3. C) more profitable.
4. D) less efficient.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

24) For their last fiscal year, the Short Company reported the following information.

What is the accounts receivables turnover rate?

1. A) 0.8
2. B) 2.8
3. C) 4.5
4. D) 7.3

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

25) The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In this case, the firm is

1. A) selling its inventory slower than the industry.
2. B) underperforming the industry.
3. C) averaging fewer days of sales in inventory than the industry.
4. D) generating fewer sales per dollar of inventory.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

26) A total asset turnover of 3 means that every

1. A) $1 in sales is supported by $3 of assets.
2. B) $3 in assets produces $1 in net earnings.
3. C) $1 in total assets is replaced on average every 3 years.
4. D) $1 in assets produces $3 in sales.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

27) On March 31, Adolpha, Inc. reported the following information on its financial statements.

What is the available net working capital for Adolpha, Inc.?

1. A) -$253,844
2. B) -$132,366
3. C) $121,578
4. D) $1,873,020

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 4

28) A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of $(1,000,000). ROE will be

1. A) 1000% indicating an exceptional opportunity.
2. B) 1000% and meaningless.
3. C) -1000% indicating that the company is in dire straits.
4. D) 10.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

29) The measure that indicates how efficiently assets are being used to support sales is called the

1. A) total asset turnover.
2. B) current ratio.
3. C) book value.
4. D) net profit margin.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

30) A lending institution would prefer that a firm have a ________ debt-equity ratio and a ________ times interest earned ratio.

1. A) higher; higher
2. B) higher; lower
3. C) lower; higher
4. D) lower; lower

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

31) Marco’s just reported an EPS of $1.80 on revenues of $440 million. The company has 13 million shares outstanding. Total assets are $380 million, current liabilities equal $78 million, and long-term debt is $122 million. Net fixed assets are worth $230 million. Given this information, which one of the following statements is correct?

1. A) Marco’s net working capital is $72 million.
2. B) Marco’s current ratio is 1.75.
3. C) Marco’s total asset turnover is 3.67.
4. D) .Marco’s debt-equity ratio is 0.75.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

32) Worcester Corporation has a P/E ratio of 15. Natick Corporation is in the same industry as Worcester, but has a P/E ratio of 20. Possible interpretations of this discrepancy include

1. A) Worcester Corporation is overpriced.
2. B) Natick Corporation has higher earnings per share.
3. C) Investors expect Natick to grow faster than Worcester.
4. D) Natick’s stock price is higher than Worcester’s.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

33) Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on assets of 9%. What is the return on equity?

1. A) 5.4%
2. B) 5.6%
3. C) 14.4%
4. D) 15.0%

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

34) Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of

1. A) 4%.
2. B) 6%.
3. C) 8%.
4. D) 12%.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

35) Investors are most interested in which one of the following ratios?

1. A) return on assets
2. B) current ratio
3. C) net profit margin
4. D) return on equity

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

36) Which one of the following is a leverage measure?

1. A) times interest earned
2. B) net working capital
3. C) return on equity
4. D) net profit margin

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

37) If a company’s ROA is high, then an investor can assume that the company

1. A) is in danger of defaulting on its loans.
2. B) pays a high dividend.
3. C) is profitable.
4. D) has more equity than debt in its capital structure.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

38) If a firm has an ROA of 10% and an ROE of 10%, then the

1. A) operating results of the firm are improving.
2. B) firm has no financial leverage.
3. C) firm must have enough cash on hand to pay some extra dividends.
4. D) firm is losing money.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

39) Kim has gathered the following information on a company.

What is the amount of the earnings per share?

1. A) $0.14
2. B) $0.25
3. C) $0.28
4. D) $0.30

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

40) Over the last 5 years, Spencer Inc.’s earnings have grown at an annual average rate of 9%. Current EPS are $1.80 and the company’s stock recently sold for $36 per share. Spencer’s PEG ratio is

1. A) .05
2. B) 20
3. C) 2.22
4. D) 222.22

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

41) JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ’s stock is currently selling for

1. A) $16.74 per share.
2. B) $17.07 per share.
3. C) $18.00 per share.
4. D) $19.35 per share.

Answer: A

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

42) When dividend payout ratios are higher than ________, investors should investigate whether or not they are sustainable.

1. A) 15%
2. B) 25%.
3. C) 40%.
4. D) 75%.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 5

43) Which of the following may be signs of future problems for a company?

1. Inventories growing faster than sales.
2. Rapidly increasing debt to equity ratio.

III. Cash flow from operations is higher than net income.

1. Current liabilities increasing faster than current assets.

1. A) I and III only
2. B) II and IV only
3. C) I, II and IV only
4. D) I, II and III only

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

44) The PEG ratio

1. A) preferred by investors is equal to 2.0 or higher.
2. B) compares the price/earnings ratio to the rate of growth of the company’s earnings.
3. C) is a measure of a firm’s liquidity.
4. D) measures the ability of a firm’s assets to generate growth for the firm.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

45) Which of the following directly impact return on equity?

1. net profit margin
2. leverage

III. return on assets

1. cash flow from investment activities

1. A) I and III only
2. B) II and IV only
3. C) I, II and IV only
4. D) I, II and III only

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

46) ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of using this expanded version of the ROE formula versus using the simplified version which is net income divided by total equity?

Answer: The expanded version provides more insight into a firm’s operations. The net profit margin reflects the efficiency of operations. The total asset turnover measures the ability of assets to generate sales. The equity multiplier reflects the use of leverage.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

47) The following information is available for the Oil Creek Corporation.

(a) What is the current ratio?

(b) What is the net working capital?

(c) What is the net income?

(d) What is the return on equity?

(e) What is the total asset turnover?

(f) What is the debt-equity ratio?

(g) What is the accounts receivable turnover?

(h) What is the earnings per share (EPS)?

(i) What is the price to earnings (P/E) ratio?

Answer:

(a) 0.88

(b) -$5,000

(c) $11,700

(d) 20.17%

(e) 1.33

(f) 0.83

(g) 10.26

(h) $0.78

(i) 18.50

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 5

7.6 Learning Goal 6

1) A company’s ratios are more meaningful when compared to other companies in the same industry.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

2) The debt to equity ratio should be approximately the same across all industrial sectors.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

3) Financial ratios give little indication whether a company is well managed or not.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

4) Investors who want to analyze a company’s ratios usually need to compute them from the financial statements.

Answer: FALSE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

5) Historical comparisons will reveal whether a company’s performance is improving or deteriorating.

Answer: TRUE

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

6) Generally, the market price of a stock is

1. A) below its book value.
2. B) above its book value.
3. C) equal to its par value.
4. D) equal to its book value.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

7) To determine whether a pharmaceutical company’s profitability ratios indicate strength or weakness, we should

1. compare them to others in the same industry.
2. compare them to companies in unrelated industries such as energy or banking.

III. compare them to previous years.

1. compare them to absolute standards established by the CFA Institute.

1. A) I and II only
2. B) I and III only
3. C) III and IV only
4. D) IV only

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

8) Which of the following is a readily available source of industry comparisons?

1. Standard & Poor’s
2. MSN Money, Yahoo Finance and other financial portals

III. Mergent (Moody’s)

1. The Wall Street Journal

1. A) I and II only
2. B) I, II and III only
3. C) III and IV only
4. D) II, III and IV only

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

9) A comparison of a firm’s current financial ratios to those of prior years allows one to

1. A) accurately predict the future performance of a firm.
2. B) see how a firm’s performance compares to that of a competitor.
3. C) see trends that are developing.
4. D) determine if the firm is performing better than the overall industry.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

10) Amgen’s debt to equity ratio is .54 while Walmart’s is .68. By comparing these ratios we can conclude

1. A) that Walmart is in danger of bankruptcy.
2. B) that Amgen uses too little debt financing.
3. C) that Walmart uses too little equity financing.
4. D) very little because the firm’s are in different industries.

Answer: D

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6

Use the following information for the question(s) that follow.

Company X and Company Y are in the same industry and have the following ratios.

11) Based on the information above, we can conclude that

1. A) company X is using leverage more aggressively than company Y.
2. B) company X is more liquid than company Y.
3. C) company X is using assets more efficiently than company Y.
4. D) company X is reinvesting a higher percentage of its earnings in the business than company Y.

Answer: B

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 6

12) Based on the information above, we can conclude that

1. A) company Y is more financially conservative than company X.
2. B) company Y is more liquid than company X.
3. C) company Y is reinvesting a higher percentage of its earnings in the business than company X.
4. D) company Y is using assets less efficiently than company X.

Answer: C

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 6

13) Company X and Company Y are in the same industry and have the following ratios.

Discuss the relative natures of the two companies in terms of risk and return. Identify the more growth-oriented firm and justify your selection. Support your discussion and conclusions by referring to the ratios.

Answer: Company Y has more financial risk because its debt/equity ratio is higher than both X and the industry average. Y’s current ratio is lower than both A’s and the industry average, indicating less liquidity and possibly a willingness to sacrifice some safety in pursuit of efficiency. Company Y has a lower net profit margin which may be caused by higher interest expenses due to the higher debt load. Company Y offers a higher return to shareholders based on the return on equity ratio. Y’s higher rate of return on equity is entirely due to its use of debt financing because return on assets is the same for both companies (1.9 × 4.2 = 2.1 × 3.8). Company X’s net profit margin is slightly above the industry average, while both companies’ return on equity ratios are below the industry averages. Company Y is probably growing faster than Company X because the dividend payout ratio is lower and the total asset turnover rate is higher.

Learning Outcome: F-09 Discuss the fundamentals of stocks and how to value them

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 6