Advanced Financial Analysis - Chapter 1

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?

$18.33

Which of the following statements concerning financial ratios is incorrect? A. Accounting principles and methods used by a company will not affect financial ratios. B. The informational value of a ratio in isolation is limited. C. A ratio is one number expressed as a percentage or fraction of another number. D. Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

A

Which of the following would not be considered a source of financing? A.Notes receivable B.Common stockholders' equity C.Retained earnings D.Debentures

A

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data. 2004 2005 2006 S 100 120 135 NI 99 118 128 TA 100 119 130 From the above information, you can infer that: A. rate of sales growth has decreased. B. net income to sales (return on sales) is increasing over time. C. asset turnover is decreasing over time. D. None of the above

A

Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with the higher dividend payout ratio: A. will have a higher inventory turnover ratio. B. will have a lower inventory turnover ratio. C. will have higher earnings growth. D. will have lower earnings growth.

D

When conducting comparative analysis by reviewing consecutive balance sheets: A. all items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1 to calculate the percentage change. B. all items on the balance sheet in Year t-1 must be subtracted from their corresponding value in Year t to calculate the dollar change. C. all items on the balance sheet in Year t must be divided by net income in Year t-1 to calculate the percentage change. D. Both A and B are correct.

D

Which of the following is not an equity valuation model? A. Free cash flow to equity model B. Dividend discount model C. Residual income model D. Payback period model

D

Which of the following ratios does not relate to market price of a company under analysis? A. Price-to-earnings B. Earnings yield C. Price-to-book D. Return on common equity

D

Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity? A. Acid-test ratio B. Current ratio C. Days' to collect receivables D. Total asset turnover

D

Which of the following statements is incorrect? A. It is possible for some markets to be more efficient than others. B. It is possible for markets to be efficient with respect to some information and inefficient with respect to some other information. C. The market is likely to be more efficient with respect to companies where there is greater analyst following. D. The market is totally efficient with respect to companies providing regular dividends to investors.

D

Which of the following statements is most correct? A. Technical analysis concerns itself with determining the intrinsic value of a stock. B. Active investing is defined as buying and selling stock within six months. C. Fundamental analysis attempts to value a company by examining the past price patterns of a company's stock. D. Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis.

D

Which of the following statements regarding the intrinsic value of a company is correct? A. It can be calculated as book value plus the present value of future expected dividends, discounted at the cost of equity capital. B It can be calculated as present value of future expected dividends, discounted at the cost of debt. C. It can be calculated as present value of future expected residual income, discounted at the cost of equity capital. D. It can be calculated as book value plus the present value of future expected residual income, discounted at the cost of equity capital

D

Present Value Theory

Value of debt or equity security = sum of all expected future payoffs from security that are discounted to present at an appropriate discount rate (time value of money)

1Common-size statements are useful for intercompany comparisons.

TRUE

A creditor's risk is said to be asymmetric because the downside is limited to the required interest payments.

TRUE

All other things being equal, the lower a company's cost of equity the higher its stock price should be.

TRUE

Details of compensation paid to officers and directors can be found in proxy statements.

TRUE

If a company has no liabilities, its return on equity will equal its return on assets.

TRUE

Prospective analysis is the forecasting of future payoffs—typically earnings, cash flows, or both.

TRUE

The current ratio will always be greater than or equal to the acid test ratio.

TRUE

Theoretically, the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

TRUE

Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.

TRUE

You are offered a bond with a $1,000 face value and 10 years left to maturity. The coupon rate of the bond it 7% and the bond makes annual coupon payments. If the expected return on the bond is 6%, what is the most you should pay for this bond?

$1,073.60

On January 1, 2012, Microsoft had outstanding a bond with a coupon rate of 7 percent and a face value of $1,000. At the end of each year this bond pays investors $70 in interest (0.07 x $1,000). The bond matures at the end of 2024. The rate of return investors demand (discount rate) on bonds that are as risky as Microsoft's bond is 6 percent. What should be the price of the bond, i.e. what should be its market value on January 1, 2012?

$1,088.52

Rivaz Corporation 2005 NI $3,000 Div $1,000 TA (12/31/05) $35,000 TL (12/31/05) $21,225 # Shares Out 1,000 Cost of Equity 12% Using the dividend discount model, assuming dividends grow at 5% per year for the next two years and at 3% thereafter, what is the value per share of Rivaz stock as of 12/31/05?

$11.87

Rivaz Corporation 2005 NI $3,000 Div $1,000 TA (12/31/05) $35,000 TL (12/31/05) $21,225 # Shares Out 1,000 Cost of Equity 12% Net income is expected to increase by 10% for the next year, and dividend payout ratio is expected to remain constant. After 2006, retained earnings are expected to decrease to zero. Using the residual income method what is the value per share of Rivaz stock as of 12/31/05?

$15.25

Rivaz Corporation 2005 NI $3,000 Div $1,000 TA (12/31/05) $35,000 TL (12/31/05) $21,225 # Shares Out 1,000 Cost of Equity 12% Using the dividend discount model, assuming dividends grow at 10% per year for the next two years and at 5% thereafter, what is the value per share of Rivaz Corporation at 12/31/05?

$16.42

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?

$56.25million

How much would you be prepared to pay for a $500 bond which comes due in 5 years and pays $80 interest annually assuming your required rate of return is 8%.

$659.71

The Management Discussion and Analysis Section of an annual report: A. is required by the SEC only if the company has suffered from unfavorable trends or there is significant uncertainty concerning the liquidity of the company. B. is required by the SEC. C. is required by the SEC only if they have a qualified audit opinion. D. is optional but normally included in the annual report. E. includes items such as revenues by business segment.

B

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy? A. Auditor's letter B. Management discussion and analysis C. Proxy statement D. Footnotes

B

Which of the following statements is incorrect? A. Current assets are expected to be converted into cash sooner than noncurrent assets. B. Equity investors have unlimited downside exposure if the company declares bankruptcy. C. Paid-in capital of company is not affected by the payment of dividends. D. Retained earnings at the inception of a company equals zero.

B

While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability? A. Highest retained earnings B. Highest return on equity C. Highest net income D. Highest operating margin

B

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data. 2004 2005 2006 S 100 120 135 NI 99 118 128 TA 100 119 130 Which of the following statements is incorrect? A. Net income in 2006 increased by 29.29% compared to 2004. B. XYZ's net income to sales (return on sales) is higher in 2006 as compared to 2004. C. XYZ's net income to sales (return on sales) is lower in 2005 as compared to 2004. D. Assets have increased over time.

B

As of December 31st, 2005, two otherwise identical companies in the same industry, East Co. and West Co., have dividend payouts of 20% and 40% respectively. Looking forward one year, which outcomes are least likely? I. East Co. requires debt financing. II. West Co. increases its dividend payout. III. West Co.'s share price is twice that of East Co. IV. East Co. repurchases outstanding shares. A. I and II B. II and IV C. I, II, and III D. II, III, and IV

C

The semistrong efficiency of market implies that: A. stock prices fully reflect all inside information. B. stock prices do not reflect information contained in past trading volume. C. stock prices fully reflect all information found in 10-K filing. D. stock prices fully reflect all information about future price changes.

C

A common-size income statement would typically be prepared by dividing: A. all items on income statement in Year t by their corresponding value in Year t-1. B. all items on income statement in Year t by their corresponding balance sheet accounts in Year t. C. all items on income statement in Year t by net income in Year t-1. D. all items on income statement in Year t by sales in Year t.

D

A company issues 12%, 10-year $1,000 bonds paying interest annually. The required return for bonds of this risk is 15%. At what price will the bond be sold (pick the closest answer)? A. $894 B. $847 C. $1000 D. $849 E. $663

D

Weak Efficiency

Price reflects full historical

The current ration is used to evaluate the company's operating performance.

FALSE

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding a financial analyst when interpreting the financial statements.

FALSE

The statement of cash flows is separated into four parts: operating, investing, financing, and planning.

FALSE

When comparing two companies, the company with the highest net income should normally have the highest stock price.

FALSE

semistrong efficiency

Price reflects full publicly available information

Strong efficiency

Price reflects all information

Fundamental Analysis

analyze key factors (w/o market value reference = intrinsic value) Buy when intrinsic > market

Solvancy

long run viability and ability to pay long term obligations

Accrual Accounting

recording in each fiscal period applicable expenses, whether paid or not, and income earned, whether collected or not.

Equity Analysis

technical analysis (charting) search for patterns in history