chapter 9/10
The final product of a security analysis is a recommendation to buy, sell, or hold shares. It is supported by forecasts and a report which summarises the rationale or foundation of the recommendations.
8 What is the final product of a security analysis? How is it supported?
D
A cross-country difference in credit supply is likely to arise from: A. Hedging strategies. B. Fixed interest. C. Floating interest. D. Bankruptcy laws.
D
A firm's debt rating indicates the likelihood that a firm: A. Can meet payments required under the yield. B. Can meet its interest payments. C. Can meet its principal payments. D. Can meet both its interest and principal payments.
C
A fund which engages in both short-selling overvalued securities and investing in undervalued securities is most likely to be which type of fund? A. Bond fund. B. Equity fund. C. Hedge fund. D. All of these choices.
C
A fund which is intended to be profitable in both rising and falling markets by taking an aggressive approach is most likely which type of fund? A. Bond fund. B. Equity fund. C. Hedge fund. D. All of these choices.
A
A loan covenant specifies: A. The actions the borrower will and will not take. B. The actions the lender will and will not take. C. Both the actions the lender and borrower will and will not take. D. Only the actions the borrower will take.
D
A negative pledge is when a firm will: A. Use assets as security for other creditors. B. Provide security that exceeds the value of the loan. C. Partition assets as security for other creditors. D. None of these choices.
B
A strictly passive portfolio manager is most likely to: A. Identify mispriced securities. B. Have a portfolio that matches a particular index or sector. C. Conduct a technical analysis. D. All of these choices.
A
A target price is likely to be ahead of the current share price by around: A. One year. B. Five years. C. Ten years. D. None of these choices.
B
A thorough analysis requires the ability to: A. Recognise whether a share is misvalued. B. Both to recognise whether a share is misvalued and to anticipate when price corrections are likely to take place. C. Either to recognise whether a share is misvalued or to anticipate when price corrections are likely to take place. D. Anticipate when price corrections are likely to take place.
D
A top-down approach to investing involves: A. Analysing how macroeconomic factors drive markets. B. Analysing how microeconomic factors drive share prices. C. Conducting a fundamental analysis. D. All of these choices.
B
A useful tool to supplement ratio analysis, particularly when assessing liquidity risk, is a maturity profile of: A. Assets. B. Liabilities. C. Equity. D. All of these choices.
B
Analysts must think about their approach to selecting candidates for analysis because: A. They need to investigate a larger percentage of securities than their competitors. B. They can only investigate a small percentage of securities on a major stock exchange. C. They can only focus on one industry at a time. D. They can only focus on one firm within each industry at a time.
C
Banks are less likely to play a role in financing requiring: A. Low credit risk. B. Very short-term commitments. C. Very long-term commitments. D. High credit risk.
C
Banks have an advantage in extending credit in certain situations because: A. They do not have to monitor the firm. B. They are regulated. C. They gain knowledge of operations through contact with managers. D. All of these choices
Net working capital/total assets = 0.9 ● Retained earnings/total earnings = 0.15 ● EBIT/total assets = 1.1 ● MV of equity/BV of total liabilities = 2 ● Sales/total assets = 2.5
Consider the following information:
D
Debt rating agencies express an opinion on: A. The ability of the firm to meet its financial obligations in full. B. The ability of a firm to afford a certain yield. C. The ability of a firm to afford a certain yield and the value of its security. D. The ability of the firm to meet its financial obligations in full and on time.
A
Due to additional investment risks from recommendations that require long-term commitments, recommendations are more likely to pay off in the: A. Short term. B. Long term. C. Either short term or long term, depending on the factors of the firm. D. None of these choices.
A
Fitch, Moody's, and Standard & Poor's are examples of: A. Debt rating agencies. B. Asset rating agencies. C. Equity rating agencies. D. All of these choices.
A
Given an efficient market, what would be the ideal investment strategy? A. Maintain a well-diversified portfolio. B. Search for mispriced securities. C. Maintain a portfolio of investments comprised of only unavoidable risk. D. All of these choices.
C
How do share prices respond to revisions in earnings forecasts? A. Negatively to upward revisions. B. Positively to downward revisions. C. Both positively to upward revisions and negatively to downward revisions. D. Both negatively to upward revisions and positively to downward revisions.
D
How might the approaches of fund managers differ? A. Whether a quantitative or fundamental approach is used. B. The degree of active or passive management. C. The production of formal or informal valuations. D. All of these choices
B
In an efficient market where information is integrated within minutes of being available, how might an agent make a profit? A. By interpreting the information and trading on it after other market participants consume this information. B. By interpreting the information and trading on it before other market participants consume this information. C. By letting other market participants consume, interpret, and communicate the information. D. None of these choices.
D
In comparison to other managed funds, a hedge fund is likely to be more: A. Passive or aggressive, depending on whether the market is rising or falling. B. Defensive. C. Passive. D. Aggressive.
Technical analysis - attempt to predict share price movements using market indicators. ● Fundamental analysis - evaluate current market price relative to future earnings and cash flow potentials.
List and describe the two forms of security analysis that a fund may choose.
Cash or market funds. ● Bond or fixed interest funds. ● Equity funds. ● Balanced funds. ● Property and infrastructure funds
List at least three major classes of managed funds
Receivables. ● Inventory. ● Machinery. ● Equipment. ● Real estate.
List three forms of security.
Maintenance of minimum net worth. ● Minimum coverage ratio. ● Maximum ratio of liabilities to net worth. ● Minimum net working capital balance or current ratio. ● Maximum ratio of capital expenditures to earnings before depreciation
List two commonly used financial covenants.
D
Loan pricing ensures the yield on the loan covers: A. The cost of borrowed funds. B. The exposure to default risk. C. Return on equity capital. D. All of these choices.
B
Predicting a movement in a share price using market indicators is an example of: A. Fundamental analysis. B. Technical analysis. C. Accounting analysis. D. Financial analysis.
B
Research has shown that analyst forecasts tend to be: A. Negative. B. Biased. C. Less accurate than a time-series forecast. D. Generally more accurate for longer-term performance than for shorter-term performance.
B
Research has shown that analysts add value to the market by: A. Making prices diverge from forecasted expectations. B. Bringing prices in line with forecasted expectations. C. Either bringing prices in line or diverging them depending on the degree of abnormal earnings. D. None of these choices.
B
Suppliers of goods are another source of finance through: A. Purchasing a secured note. B. Providing finance on purchases on an unsecured basis. C. Purchasing an unsecured note. D. Purchasing a commercial bill.
A
The Altman Z-score is used to assess: A. Bankruptcy. B. Credit risk. C. Default risk. D. Business risk.
A
The Merton model does not specify which asset parameter? A. Liquidity. B. Values. C. Expected return. D. Volatilit
D
The final product of security analysis is: A. A forecast of the earnings. B. All of these choices. C. Providing a target price. D. A recommendation to buy, sell, or hold shares.
A
The first step in a credit analysis is to: A. Review the borrower's financial status. B. Find out why the potential borrower wants credit. C. Find out the sort of credit the borrower needs. D. None of these choices.
B
The investment objectives of individuals are likely to be: A. Homogeneous. B. Idiosyncratic. C. Aggressive. D. Passive.
C
The ratios of focus under credit analysis do not provide emphasis on: A. The current level of debt. B. The debt policies of the firm. C. The future level of debt. D. The firm's debt policy.
B
The two ways to lend or borrow are: A. Closed-end credit and fixed-term mortgages. B. Closed-end credit and open-end credit. C. Open-end credit and credit cards. D. Credit cards and rollover loans.
C
Under a floating interest rate: A. The fair value of the borrowing changes as interest rates change. B. Cash flows are fixed but the discount rate changes. C. Cash flows change with a change in interest rates. D. All of these choices.
A
Under the efficient markets hypothesis, a security price which reflects all public information fully and immediately upon its release would be an example of: A. Strong-form efficiency. B. Semi-strong-form efficiency. C. Weak-form efficiency. D. Semi-weak from efficiency.
B
Using the Altman Z-score, a firm is likely to go bankrupt if a score is less than: A. 3.57 B. 1.81 C. 2.67 D. 4.62
B
What is one lesson of the efficient markets hypothesis? A. Security markets only reflect publicly available information that has been released. B. Security markets reflect publicly available information and anticipate information not yet released. C. Markets are always in a strong-form efficiency. D. Markets are always in a weak-form efficiency.
A
What range is required for a Z-score to be classified as being in the grey area? A. 1.81 and 2.67. B. 1.81 and 4.62. C. 2.67 and 4.62. D. 1.81 and 3.57.
D
What sort of investments would a managed fund target? A. A broad class of securities and investments. B. All of these choices. C. Debt instruments. D. Specific securities and investments.
C
When assessing credit risk, the ratings provided by Moody's incorporate: A. Numbers. B. Letters. C. Numbers and letters. D. Letters and symbols.
B
When compared to extending credit, refinancing is generally: A. Harder. B. Easier. C. More time consuming. D. Less time consuming.
C
Which of the following factors would influence how a security analyst invests their time? A. The degree of unavoidable risk in the market. B. The degree of avoidable risk in the market. C. How quickly and efficiently information becomes incorporated in security prices. D. All of these choices.
D
Which of the following would be a competitor of a commercial bank? A. Investment bank. B. Insurance company. C. Government agency. D. All of these choices.
C
Which of the following would be an example of an informal valuation? A. Making recommendations solely based on information already recognised by others. B. Making recommendations based on a quantitative approach. C. Making recommendations solely based on unearthing information not recognised by others. D. Making recommendations based on a fundamental analysis
D
Which of the following would be an example of security? A. Inventory. B. Machinery. C. Real estate. D. All of these choices.
D
Which of the following would be evidence of a very efficient market? A. Prices of large and actively traded firms respond to information by the next day. B. Information is announced and the market reacts slowly. C. It is easy to identify funds that consistently generate abnormally high returns. D. None of these choices.
D
Which of the following would not be a factor when considering security? A. Leverage of the company. B. Liquidity of the security. C. The amount that can be lent on the asset offered as security. D. The best guess scenario.
C
Which of the following would not be obtained on a listed debt market? A. Bonds. B. Commercial paper. C. Long-term loans. D. Various debt issues.
C
Why is it difficult to measure whether managed funds earn superior returns? A. Tests of fund performance are not sensitive to time periods. B. There is only one benchmark for gauging performance. C. Volatility in the market limits the power of statistical methods. D. Traditional measures of fund performance abstract from industry-specific performance. E. All of these choices.
