S7-19: Securities Analysis
Would a conversion of a convertible bond for stock increase or decrease Shareholders Equity?
Shareholders Equity would be increased because there would be more stock capital outstanding
Utilities are frequently referred to as companies which "Trade on the _____________" because they can do a large business on borrowed funds without increasing equity positions.
"Trade on the Equity"
Whenever a company has bonds outstanding, we say that the company is a "_______________" company.
"leveraged" company
The standing ratio for a healthy corporation is that there should be $___ in current assets for every $1 in current liabilities
$2 in current assets for every $1 in current liabilities
These are some of ABC Corps financials: Operating profit: 5mil Net Earnings: 3.5mil Retained Earnings: 1.5mil Total common shares outstanding: 50 mil What is ABC Corps EPS?
(see pic)
What four components comprise Shareholders Equity on a balance sheet?
(see pic)
What is acid test or quick ratio?
(see pic)
What is the Current Ratio of a company?
(see pic)
XYZ Corporation had net income of $12 million. Its shareholders equity is $150 million. What is XYZ Corporations return on equity.
(see pic)
The Value Line Index is a sampling of approximately __________ stocks from the NYSE, Amex, NASDAQ, an dOTC market. IT is an equally weighted average.
1,675
Current Liabilities of a corporation are debts that must be paid in the upcoming _______ month period.
12 month
Current Assets of a corporation are items that are cash or will be converted to cash in the upcoming _______ month period. These are listed in order of liquidity on the balance sheet.
12 months
The Dow Joes Industrial Average is the market price of _______ selected common stocks divided by a constant (no capitalization weighted)
30 selected common stocks
The Dow Jones Composite Average contains _____ common stocks from the industrial, transportation, and utility indices.
65 common stocks
A Selling ___________ normally occurs at the end of a bear market. It is a share drop in stock prices accompanied by increasing volume after a lengthy market decline.
A Selling Climax
Advance-_______________ Theory is concerned with the number of stocks that advance in relation to the number that decline. It is a good measure of the strength of a bull or bear market.
Advance-Decline Theory
__________ is best described as a measure of the extent to which a stocks price will react to news or events that relate to a particular company, such as a change in the company's management.
Alpha (always company specific)
Why is Net Earnings one of the most important numbers on an Income statement?
Because Net Earnings is used to calculate the Earnings Per Share (EPS) on Common Stock
___________ is best described as a measure of the volatility of a particular stocks price when compared to the market as a whole.
Beta
Bond Interest is always a (pre/post)-tax Deduction. Dividends are always a (pre/post)-tax Deduction.
Bond Interest is always a pre-tax Deduction. (Involuntary Debt Service = Have to) Dividends are always a post-tax Deduction. (Voluntary = Want to)
What security will you always see listed under Long Term Debt on a companies Balance Sheet?
Bonds
____________ of the Market refers to the percentage of stocks participating in a particular market move. Charting the advances vs. declines in stock prices is included in the "_________________"
Breadth 2x
A head and shoulders bottom or inverted formation indicates a (bullish/bearish) and a reversal of a downward move
Bullish
_______________ _____________ ______________ _____________ (CAPM) is a sophisticated model of the relationship between expected risk and expected return. This theory believes that investors demand higher returns for greater risk.
Capital Asset Pricing Model
A ___________ ___________ Statement measures the amount of cash coming into and being paid out fo a company based on its balance sheet and income statement.
Cash Flow Statement
What term is used to describe the market when it is moving sideways?
Consolidating
What are the three types of assets that a corporation can have?
Current Assets Fixed Assets Other Assets (Intangible)
_______________ is a decrease in the earnings per share resulting from additional shares being issued because of the issuance of a new issue or the exercise of options, warrants or convertible securities. A current common shareholders interest would not be diluted by a stock split or stock dividend.
Dilution
Durable goods are goods which have a life of ______ or more years and are monitored monthly by the Commerce Department. Durable or "hard goods" include home appliances. Non-durable or "soft goods" include food, fuel, drugs, clothing, and alcoholic beverages.
Durable goods "hard goods" are goods which have a life of 3 or more years
______________ Asset Allocation: Involves frequent changes in asset composition in response to changes in the market and economic conditions.
Dynamic Asset Allocation
A basic summary of _____________ ______________ ______________ would be that this theory does not think that Technical or Fundamental Analysis will earn or be able to produce better than average rates of return.
Efficient Market Hypothesis
______________ Market Hypothesis: Is an investment theory that states that it is impossible to beat the market because the stock market is efficient, meaning that current share prices always reflect all relevant information. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
Efficient Market Hypothesis
_____________ Assets are generally carried at cost less depreciation. Depreciation allocates the cost of a __________ asset over the useful life of the asset. Depreciation reduces taxable income without reducing cash.
Fixed Assets 2x
________ ___________ Earnings Per Share is calculated assuming all potential dilutions occur from convertible bonds, stock options, convertible preferred stock, and warrants.
Fully Diluted Earnings Per Share
_______________ Analysis is concerned with a specific company an its factors.
Fundamental Analysis
What would a portfolio with a Beta of 1, be expected to do, as far as performance in comparison to the overall market?
It would be expected to move about the same as the market
Market __________________ is a measure of the rate of acceleration of a price movement. It includes the degree of strength or weakness in various industry groups and the price and volume trends in the market.
Market Momentum
Market _______________ describes the bullish or bearish outlook or mood of investors.
Market Sentiment
More capitalization of a company obtained via stock is considered (conservative/speculative) More capitalization of a company obtained via debt is considered (conservative/speculative)
More capitalization via stock is considered conservative (because stock holders do not have to be repaid) More capitalization via debt is considered speculative (because debt holders do have to be repaid)
Where are dividends on Preferred Stock pulled from?
Net Income (EAT = Earnings After Tax)
Is the Dow Jones Industrial Average capitalization weighted?
No
Does Program Trading consider Fundamental Analysis Factors?
No (Program Trading is all about Technical Analysis)
What is the difference between Dollar Cost Averaging and Constant Dollar Investment Plans?
Nothing, they are the same thing
From sales you deduct ___________ Costs: Cost of goods Sold Selling and Administration Costs Depreciation
Operating Costs
Operating _________ - (EBIT) Earnings before Interest and Tax
Operating Profit
______________ Investment Management is characterized by: replicating or matching the holdings of an index, buying and holding (not actively trading), low management fees
Passive Investment Management
Short _____________ Theory - Since a short seller must at some point be a buyer to cover the short, this cushion will support a declining market and accelerate a rising one. Therefore, a small short interest makes a technically weak market and a large short interest makes a technically strong market.
Short Interest Theory "Short Squeeze"
______________ Asset Allocation: Generally keeps the assets in the portfolio at an assigned balance.
Strategic Asset Allocation
______________ Asset Allocation: Redistributes percentages of assets in each sector of a portfolio including stocks, bonds, or cash, depending on the current market performance of each sector
Tactical Asset Allocation
_______________ Analysis is concerned with market price moves and trends.
Technical Analysis
The ___________ _______________ of a corporation shows all of the assets and liabilities as of a particular date, usually the end of the year.
The Balance Sheet
What is the document that shows; The amount of the corporations revenues, The expenses that were paid, and the amount of earnings remaining after expenses over a period of time?
The Income Statement or Profit and Loss Statement(P&L Statement)
If someone asks "what is the multiple at which that stock is selling?", what are they asking for?
The PE ratio
The _____________ Walk theory says that past price movements cannot be relied upon to predict future price movements. It says that the stock market is perfectly efficient and reacts instantly to new information. It says that it s futile to try to outperform the market.
The Random Walk theory
The _______________ Level is the price at which an upward trend is expected to level off.
The Resistance Level
The _______________ Level is the price at which a downward trend is expected to level off.
The Support Level
What is the Odd Lot Theory when talking about Technical Analysis of a stock?
The theory that odd lot buyers are always going to be wrong, so your should buy when they are selling, and sell when they are buying.
When talking about Shareholders Equity listed on a Balance Sheet, what does Paid in Surplus or Capital mean?
This is a record of the excess over par received from the sale of common stock.
How do you calculate the Average Cost per share when using Dollar Cost Averaging?
Total Dollars Invested / total shares purchased ($400 invested total over a few months and 45 shares purchased = $8.89 per share average )
After Bond Interest is deducted, are are left with __________ _________ (EBT)
Total Income (EBT = Earnings Before Tax)
____________ Theory - Trading volume is bullish when it is heavy on a advances and light on declines. It is bearish if it is light on advances and heavy on declines.
Volume Theory.
The broadest index is the _____________ which measures the dollar value of all the shares of more than the top 5,000 publicly traded stocks in the U.S.
Wilshire
A constant dollar investment plan requires that: [A]A fixed amount in dollars be invested at regular intervals. [B]A fixed percentage of a portfolio's assets be kept in equities regardless of stock prices. [C]A fixed amount of dollars of a portfolio's assets be kept in equities regardless of stock prices. [D]A fixed number of shares be invested at regular intervals.
[A]A fixed amount in dollars be invested at regular intervals. EXPLANATION Constant Dollar Investment Plans or Dollar Cost Averaging is a method of purchasing equal dollar amounts of a specific security at regular pre-established time intervals.
Assume that for the past week, the number and dollar value of shares purchased by odd-lotters have been approximately 25% less than the number and dollar value of shares sold by odd-lotters. If this trend continues according to the odd lot theory, it would be: [A]Bullish [B]Bearish [C]Meaningless [D]An indication that total trading volume has increased
[A]Bullish EXPLANATION The Odd Lot Theory believes that odd lot investors are always wrong; therefore, you should buy when odd lot investors are selling and sell when odd lot investors are buying. Using this philosophy the past weeks trend would be considered bullish.
Mr. Cautious wishes to minimize risk in his common stock portfolio. He may accomplish this by investing so that: I. The largest percentage of the securities in the portfolio are affected differently by economic conditions. II. The largest percentage of the portfolio consists of leading common stocks. III. The smallest percentage of the portfolio consists of leading common stocks. IV. The smallest percentage of the securities in the portfolio are affected differently by economic conditions. [A]I and II [B]I and IV [C]II and III [D]III and IV
[A]I and II EXPLANATION Customers wishing to minimize risk in a common stock portfolio can accomplish this by investing so that: 1. The largest percentage of the securities in the portfolio are affected differently and 2. The largest percentage of the portfolio consists of leading common stocks.
Under which of the following conditions will the average cost per share to the investor, over a period of time, always be lower than the average price per share? I. If a fixed dollar amount is regularly invested. II. If he follows a constant dollar plan. III. If a fixed number of shares is regularly purchased. IV. If the price of the stock fluctuates. [A]I, II, and IV [B]I, III, and IV [C]II, III, and IV [D]All of the above
[A]I, II, and IV EXPLANATION Under Dollar Cost Averaging the average cost per share to an investor over a period of time will always be lower than the average price per share if a fixed dollar amount is regularly invested and the price of the stock fluctuates.
Which of the following is generally true of the price-earnings ratio? [A]It is often used to compare a particular stock to other stocks within the same industry. [B]It is used to compare stocks based on yields. [C]The higher the P-E, the greater the value to investors. [D]The P-E ratio is a good indicator of future revenue growth.
[A]It is often used to compare a particular stock to other stocks within the same industry. EXPLANATION The P-E ratio is commonly used to compare stocks within the same industry or sector. A high P-E generally means the stock is overpriced. The P-E ratio does not measure yield and is not an indicator of revenue growth.
A portfolio with a Beta of 1.3, when the market moved substantially, would be expected to: [A]Move more than the market [B]Move the same as the market [C]Move less than the market [D]Not be related to the market move
[A]Move more than the market EXPLANATION Beta is best described as a measure of the volatility of a particular stock's price when compared to the market as a whole. A portfolio with a Beta of 1.3 would be expected to move a little more than the overall market.
The portfolio most suitable for a pension fund interested in income would be: [A]Government securities, time deposits, and naked option writing.[B]Government securities, corporate bonds, and fully covered option writing. [C]Government securities, corporate bonds, and naked option writing. [D]Government securities, municipal bonds, and fully covered option writing.
[B]Government securities, corporate bonds, and fully covered option writing. EXPLANATION A suitable portfolio for a pension fund interested in income would include government securities, corporate bonds, and fully covered option writing. Pension funds would not be interested in muni bonds or naked call writing.
Which of the following would be used in the fundamental analysis of a security? Support and resistance levels I. Trading volumes II. Liquidity ratios III. Historical earnings trends [A]I, II [B]III, IV [C]I, II, III [D]All of the above
[B]III, IV EXPLANATION The following factors would be examined in a fundamental analysis of a security. 1. Management 2. Earnings 3. Company outlook 4. Company's annual report 5. P/E Ratio Support levels, Resistance levels, and trading value are considered to be part of Technical Analysis.
A corporation's Net Earnings are found in which of the following? [A]Balance Sheet [B]Income Statement [C]Current Ratio [D]Net Working Capital
[B]Income Statement EXPLANATION The Profit and Loss or Income Statement would show the corporation's Net Earnings.
If the amount on the balance sheet representing shareholders' equity declines as a result of a corporate transaction while assets remain unchanged, which of the following must have occurred? [A]A decrease in prepaid expenses [B]An increase in total net worth accounts [C]An increase in total liabilities [D]A decrease in accrued expenses
[C]An increase in total liabilities EXPLANATION If shareholders' equity declines while assets remain unchanged, an increase in total liabilities must have occurred. There are only three major categories on a balance sheet. - Assets - Liabilities - Shareholder's Equity
Technical analysis would be used by a fundamental analyst when the analyst is trying to determine which of the following? [A]Capital structure [B]Current ratio [C]Pricing and timing [D]Earnings trends
[C]Pricing and timing EXPLANATION A Fundamental analyst would use technical analysis when trying to determine the pricing and timing of a security.
According to technical analysis, all of the following would track investor sentiment EXCEPT: [A]Investment advisory census surveys. [B]Amount of short selling. [C]Revisions of earnings estimates by a corporation. [D]Number of small investors trading on margin.
[C]Revisions of earnings estimates by a corporation. EXPLANATION Revisions of earnings estimates by a corporation would not be a measure of investor sentiment. Earnings are fundamental.
Duration on a bond measures: [A]the interest coverage on the bond [B]the quality of the bond [C]price volatility of the bond [D]spread between the bid and the ask price
[C]price volatility of the bond EXPLANATION Duration on a bond measures the bond's price sensitivity or volatility to small changes in interest rates, relative to the bond's maturity.
Which of the following affect earnings per share? I. Changes in the method of inventory valuation. II. The acquisition of another corporation through the issuance of bonds (fixed obligations) of a subsidiary. III. The spin-off of a subsidiary. [A]I and II [B]II and III [C]I and III [D]All
[D]All EXPLANATION All of these options will affect earnings per share. Number I could either increase or decrease them. II would decrease earnings per share and III would most likely increase them.
If convertible bonds are converted into common stock, which of the following items on the issuing company's balance sheet would change? I. Total Assets II. Total Liabilities III. Working Capital IV. Shareholders' Equity [A]I and II [B]I and IV [C]I and III [D]II and IV
[D]II and IV EXPLANATION Total Liabilities would be reduced due to the conversion and shareholder's equity would be increased due to the additional common shares.
An investor wants to place an order to buy securities because odd-lot purchases are twice odd-lot sales, and thinks this is a buying opportunity. The registered representative should: [A]Advise the customer to increase the order. [B]Take the order telling the investor that his technical analysis is excellent. [C]Describe the odd-lot theory and its use in fundamental analysis. [D]Properly explain the odd-lot theory and advise the client to rethink the order.
[D]Properly explain the odd-lot theory and advise the client to rethink the order. EXPLANATION The basis of the odd lot theory is that odd lot investors are always wrong; therefore, the registered representative should explain the theory and advise the client to re-think the order.
A securities analyst reports that a cyclical change in non-durable goods has occurred on the downside over the last quarter. Which of the following has probably been a poor investment over the last three months? [A]Shares in a steel company [B]Industrial revenue bonds [C]Shares in a home appliance manufacturer [D]Shares in a brewery
[D]Shares in a brewery EXPLANATION A, B & C all represent things which are durable and would have a life of 3 or more years, but beer is non-durable.
The technical market theory which states that the small investor is usually wrong, buying at market peaks and selling at market bottoms, is called: [A]The short interest theory. [B]The advance-decline theory. [C]The Dow Theory. [D]The odd lot theory.
[D]The odd lot theory. EXPLANATION Small investors often trade in odd lots, hence the name "odd lot theory." Those who believe in the odd lot theory buy when small investors are selling and sell when small investors are buying. This theory believes the odd lot investor is always wrong.
Which of the following is the term used to describe the institutional arbitrage of various securities, including stocks and options, as well as indices? [A]This is known as the allocation of assets. [B]This is known as overall portfolio analysis. [C]This is known as systematic investment. [D]This is known as program trading.
[D]This is known as program trading. EXPLANATION Program trading is the term used to describe computer-driven trading which is mostly related to arbitrage situations. The computer programs used are constantly comparing various securities in various markets to identify arbitrage situations. When such situations occur, the program will automatically buy or sell. Such programs are sometimes blamed for excessive volatility in the marketplace as a whole.
A corporation's capitalization structure in which of the following industries would reflect substantial "trading on the equity"? [A]Construction equipment [B]Automotive [C]Clothing manufacturing [D]Utility
[D]Utility EXPLANATION Utilities are frequently referred to as companies which "Trade on the Equity" because they can do a large business on borrowed funds without increasing equity positions.
Where can you find the number of shares outstanding on a Balance Sheet?
at the bottom of the Balance Sheet
Why do pension funds not normally put Muni Bonds in their portfolios?
because pension funds are not in need of tax-exempt income (the pension fund is already in a tax exempt status)
A "highly leveraged" company would be greatly affected by changes in ___________ rates
changes in interest rates
What is an easy way to find out if a Corporation has a conservative or speculative capital structure?
compare the percentage of their capitalization that came from issuing debt vs the percentage that came from issuing common stock. More capitalization via stock is considered conservative More capitalization via debt is considered speculative
A head and shoulders top formation indicates a breakout on the (downside/upside) from an upward trend
downside (This is a reversal of an upwards trend! )
When prices are sharply rising, the effect of using FIFO on valuations of inventory would cause an (increase/decrease) in reportable income to the company.
increase
If a company issues bonds at par, would total assets increase or decrease?
increase because they receive the cash from the issue
EPS may be (decreased/increased) by: Tax loss carry forward Reduction of corporate income tax rates retirement of outstanding bonds
increased
If a corporation refinanced by calling in a 7% preferred stock with money obtained from the issuance of a 7% bond issue, the immediate effect would cause the earnings per share on common stock to be (decreased/increased)
increased (because bond interest is a pre-tax deduction so less taxes would be paid, therefore more money left over for EPS)
The NYSE Composite Index is affected by price changes of all listed common stocks (common stocks only). The largest component of this index is _______________.
industrials
A portfolio with a Beta of 0.8 would be expected to move (more/less) than the market.
less than the market.
On the date that a corporation declares a cash dividend on common stock, it becomes a current _____________ on the balance sheet of the corporation. When the cash dividend is paid the effect on the balance sheet would be a decrease to the current liabilities.
liability on the balance sheet
A portfolio with a Beta of 1.3 would be expected to move (more/less) than the market.
more than the market
The higher the duration, the (less/more) volatile the price of a bond will be.
more volatile (Duration means the degree of sensitivity in a bonds price to small changes in interest rates and length of maturity of the bond. Bond buyers should look for bonds with a low duration)
What is the difference between the Income Statement and Profit and Loss Statement (P&L Statement)?
nothing, they are the same thing
Do pre or post tax deductions have the effect of increasing EPS?
pre-tax deductions (this would decrease the taxes that would be paid, therefore more money left over for EPS)
Is the DJIA price or cap weighted?
price weighted
if overall investors stopped buying longer-term bonds that would most likely cause the average maturity on new issues to be (shorter/longer) to make them attractive to investors.
shorter