Bloomberg

At its peak at the end of 1999, Microsoft had a market cap of $600B. PC sales were booming and most PCs ran on Microsoft software. Revenue was growing 30% per year. The P/E ratio peaked at nearly 80.0x in 1999. Looking at this chart, what happened in the subsequent 15 years?

The decline in the P/E ratio more than offset earnings growth and this pushed the market cap down. There was decline in stock price post 1999 and the earnings grew, however the market capitalization which is price of stock multiplied by number of outstanding shares declined due to decrease in Price of stock. Market Cap = P/E ratio * Earnings Market cap is dependent on both the P/E ratio and Earnings as shown by the formula and as shown on the graph, the P/E ratio kept on decreasing which means that for the Market Cap to decrease, the downward pull of the P/E ratio must have overshadowed the growth in earnings such that the Market Cap went down instead of up. For instance, if the earnings were $40 billion and the P/E ratio was 15, Market Cap would be $600 billion. If earnings increased to $45 billion but P/E ratio decreased to 10, Market Cap would become $450 billion.

Below is a table for the steel producers Dashboard, which shows the sources of demand for steel products globally. Given the data, which of the following would be of most interest to prospective investors in steel?

The impact of China's recession on the commercial real estate market

You are an analyst for a home-building company tasked with creating a financial model of home-building trends. Which of the following factors should your model address?

The price of wood products and long-term interests rates

Company X was expected to have earnings per share of $0.52 for the upcoming quarter. On the day of the results, the company reported earnings per share of $0.83. What happened to the share price when the stock market opened?

There is not enough information to tell

You buy the stock of four consumer goods companies in March 2014 and hold them for five years until March 2019. Here are the TRA charts from Bloomberg for all four stocks. The "Buy Price" in the top left-hand corner is the price you paid for each stock. The price of the stock in March 2019 is noted in the chart's legend. The legend also states the Dividend Adjusted Value of the stock in March 2019, which is the value of the stock including reinvested dividends over the holding period. For which stock did the bull of the total return come from dividends?

Unilever

The World Equity Index function shown contains two valuation metrics for the S&P 500. The Verizon description page contains the same two valuation metrics. How does Verizon's valuation compare to that of the S&P 500?

Verizon is less expensive than the S&P 500 on both a P/E and dividend yield basis

which of the following statements is true?

When you buy an equity, the most you can lose is 100% and your potential gain is unlimited

Corporate bond issuers go bankrupt more frequently than governments, as they do not have a tax base to fall back on in hard times

Why did the corporate spread significantly widen during the 2008 market crash?

Why do companies manager-owners smile when they rind the stock exchange bell at their IPOs?

an IPO reveals the value of the manager-owner's stake

The purchase of which of the following products is most affected by interest rates?

apartment

What is the primary driver of the left-hand end of the yield curve?

central bank interest rates

what are the three main transmission mechanisms by which the yield curve affects the economy?

corporate impact, global impact, consumer impact

The two yield curves in the chart are from September 10, 2001 (yellow line) and from October 10, 2001 (green line). What do you think the Federal Reserve did with interest rates in the month following the attacks of September 11, 2001

cut interest rates

How is enterprise value calculated?

enterprise value = market cap-cash+debt

What is a reason one discounts future cash flows as part of the absolute valuation process?

investors prefer cash flows today to cash flows in the future

what role does beta play in absolute valuation?

it determines how risky a stock is in comparison to the overall stock market

what does it mean when a company's corporate spread tightens?

the company's bonds are outperforming the benchmark yield

Here is the capital structure of Microsoft. What part of the $117.67 share price (to the nearest dollar) is represented by cash?

$17

What is the 10-year to 3-month term premium of the following yield curve?

0.079%

The S&P 500 stood at 1848 at the end of 2013. According to the chart, what would the approximate return be on the S&P 500 from the trough of March of 2009 to the end of 2013, ignoring dividends?

170%

Assume that an investor in the S&P 500 reinvests his dividends. According to the chart, what approximate return would this investor have reaped from the early 2009 trough to the endpoint of the chart?

340%

On the chart below, if the earnings per share grew from 7.61 on December 31, 2018, to 7.82 on June 30, 2019, what would the implied earnings yield be?

4.1% EY = Earnings per share / price per share = 7.82/190.71 = 0.041 = 4.1%

The number at the bottom right of each supplier's box shows the portion of Boeing's total costs in the last year that went to that supplier. The number at the bottom right of each customer's box shows the portion of the customer's capital expenditure (money spent on high value purchases) in the last year that went to Boeing. What is the capital expenditure (CAPEX) for Boeing's largest airline customer?

60.68%

Here is the WACC function for U.S. drug company Merck. The WACC calculation has been hidden. What is the WACC?

8.1%

Which of the graphs most clearly represents investors predicting a downturn in the economy?

A

Engines are the most expensive, heavy component on an aircraft and are designed with detailed specifications. Which of the following would likely be the best theme for a Rolls-Royce analyst research note to help a portfolio manager decide between investing in Rolls-Royce or United Technologies?

A comparison of the commercial prospects of new aircraft models

The importance of cash flows in the absolute valuation process is most similar to which of the following?

A fishery exceeding fishing quotas, because it values short-term income more than long-term fishing stock

A luxury cell phone maker has a high fixed-cost base and a lot of debt. Which stakeholder in the company would you rather be?

A shareholder in a booming economy

What does the release of earnings announcements have in common with the release of economic indicators?

Both are scheduled in advance

Here is a table from Bloomberg intelligence aluminum dashboard which shows the different end-users of aluminum in China. Which of the following Bloomberg headlines would be of most interest to an aluminum trader in China?

China's Aluminum Demand Weathers Real-Estate Slowdown So Far

This chart shows a scatterplot with the x-axis being the estimated sales growth and the y-axis being the estimated P/E multiple. Given this data alone, which of the following companies may warrant further analysis by a portfolio manager looking to buy an insurance company for her portfolio?

Chubb

Company A pays a dividend of 2%. Company B's stock price increases by 1% plus the inflation rate every year. Company C pays 3% dividends, and its stock price decreases every year by 2%. Company D pays 0% dividends, and its stock price does not increase year over year. If the companies are otherwise identical, which would you invest in?

Company B

When an analyst is looking at a company for the first time, which of the following four activities does he do first?

Defines the industry or industries in which the company operates

Why are equities volatile?

Due to the residual nature of earnings

A rise in which of the following inputs will increase an absolute valuation?

Earnings estimate

Here is a chart of the Nasdaq Composite, the world's main technology index. It peaked in the dotcom bubble on March 10, 2000. The P/E....

Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 30.3x

Look at the below yield curve inversion chart. What is most likely to happen as a result of the most recent yield curve inversion shown?

GDP will dip

The Dow Jones Industrial Average index has an unusual weighting methodology. Unlike the S&P 500, it is weighted by share price. Here are 20 of the 30 members of the Dow Jones on March 20, 2019. If all the shares went up by 5%, which share on the screen shown would have the biggest contribution to an upward movement in the index?

Goldman Sachs

What is the prime reason that Jenny's discretionary income is more volatile than her salary?

Her mortgage payments and necessities are fixed

Why do companies do IPOs?

IPOs incentivize entrepreneurs to innovate as IPOs provide a way for entrepreneurs to monetize their work

Masco is a consumer discretionary company that focuses on home improvement products. Here is a breakdown of the revenue concentration by industry. Which of the following headlines would be of the most interest to potential investors?

Kitchen and Bathroom Remodeling is up more than 8% as Homeowners look to improve house values

Which company is most exposed to the ups and downs of the aircraft engine industry?

MTU Aero Engines

Which of the following is most likely to be the most challenging part of this first step of the absolute valuation process?

Making the assumptions upon which to project future performance

What may be a problem of comparing the P/E of a stock to the PE of the overall market?

P/E ratio indicates the number of times the investor must pay for a stock as compared to its current earning per share. This helps the investor to take a wise decision related to the recovery of the invested funds. In case of, P/E ratio for stock the volatility is high due to market price gets affected on individual basis, whereas the market P/E is based on P/E of the major stocks and accordingly, a negative fluctuation in one stock may get covered by the 2positive fluctuations in the other stock. Hence, the stock's P/E ratio can remain above or below market average for extended periods.

Which company is worth less, Coca-Cola or Pepsi?

Pepsi because it has a lower market capitalization

What input do both absolute valuation and relative valuation typically require

Short-term forecasts

Which of the following stocks is LEAST sensitive to the movement of the overall stock market?

Starbucks

Here is a chart of the index value for the S&P 500 and the United Kingdom's main equity index, the FTSE 100, from the end of 2008 to early 2015. The labels have been removed. One index has clearly outperformed the other. Over this period, there was a technology boom and an oil crash. Here are pie charts showing the early 2015 index compositions by industry for both the S&P 500 and the FTSE 100. Which index outperformed?

The S&P 500 Index

In 1999, James Glassman and Kevin Hassett published a book called "Dow 36,000". At the time, the Dow Jones Industrial Average Index was just under 12,000. Which of the following is a potential substitute for the book title?

The Sum of the Share Prices of All 30 Dow Jones Members Will Triple

what are the possible weaknesses of this peer approach to valuation?

The chosen peers might not be true competitors, the company might have multiple divisions, and the most appropriate competitors might not have P/E multiples

Widget Co has a market capitalization of $125M. It does a 5-for-1 stock split. It does a 1-for-25 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. What's the new market cap?

$125

If the earnings per share of a company is $3.85 and the earnings yield is 2.5%, what is the price per share?

$154.00