Analytical Marketing

A corporation's balance sheet shows total assets of $930,000 of which $400,000 are current assets. It also shows $525,000 of total liabilities of which $215,000 are current liabilities. The company's working capital is A) $185 ,000. B) $310,000. C) $715,000. D) $405,000 .

A) $185 ,000. Working capital is current assets minus current liabilities. In this question, that is $400,000 minus $215,000, or $185,000. As is often the case, there are numbers shown that have no relevance to the question.

XYZ Corporation has a beta of 1, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 14.8%. Based on this information, ABC had alpha of A) -2% B) 2% C) 14.8% D) 2.8%

A) -2% Alpha is the extent to which a security's performance exceeds {or falls short of) what would be expected based on its beta. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than one with a beta of 1.0. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% x 1.4). With an actual return of 14.8%, ABC underperformed the expected by 2% and that is why it has a negative alpha.

If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between A) -20.5 and +37.9% B) 8.7 and 23.3% C) 0 and 37.9% D) -5.9 and +23.3%

A) -20.5 and +37.9% A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be-20.5% and +37.9%, which is computed by calculating return movements of 29.2% (14.6 x 2) in either direction.

XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be A) 15 B) 3 C) 5 D) 45

A) 15 Before the split, the stock had a P/E ratio of 15 ($45 per share+ $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price= $15, new EPS = $1).

Last year, ABC Corporation had earnings per share of $5 and paid a quarterly dividend of $.75 per share. It has a current market value of $75. What is its price-earnings ratio? A) 15:1 B) 50:1 C) 25:1 D) 10:1

A) 15:1 The dividend information is irrelevant. The price-earnings ratio is the price of the stock ($75) divided by the earnings of the stock ($5), or 15:1.

FNK reported earnings of $2.47 per share last year on its stock, which is trading at 24.75. It paid a $0.93 dividend on its common stock. What was its dividend payout ratio? A) 38% B) 67% C) 26.6% D) 10%

A) 38% Be careful don't assume dividend in question is the quarterly dividend unless it specificly state that fact. The company earned $2.47 per share and paid a $0.93 dividend per share. which is 38% of the earnings ($0.93 / $2.47 = 38%).

Moonglow Specialties, Inc., is currently trading at $20 per share. Recently, the company reported net income of $1 million. The company is capitalized with 200,000 common shares and $5 million of 20-year debentures with a coupon of 4%. Given the data, Moonglow's price-to-earnings (P/E) ratio is closest to A) 4 times. B) 3 times. C) Slimes. D) 2times.

A) 4 times P/E ratio= market price per share + earnings per share. Earnings per share= net income+ shares= $1 million / 200,000 shares= $5. P/E = 20 / 5 = 4. The net income is after all expenses including the interest on the debentures. As is frequently the case, the question includes information irrelevant to the answer.

Which of the followings measures should be used to assess the risk-adjusted return of an active portfolio manager? A) Alpha B) Theta C) Gamma D) Beta

A) Alpha Alpha is a measure of risk-adjusted return. It is the return in excess of the compensation for risk. It is often used to assess the performance of active managers.

Which of the following statements regarding investment theory is not correct? A) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. B) Combining two stocks with a negative correlation coefficient can significantly reduce the portfolio's standard deviation. C) A correlation coefficient of 0.14 between the returns of Stock C and Stock L indicates that very little of Stock C's returns can be attributed to the returns of Stock L. D) In a well-diversified portfolio, diversifiable risk is zero.

A) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation} and the closer the correlation coefficient gets to zero (and 0.14 is close}, the more random the relationship between the returns earned by two securities.

A client owns an investment-grade bond that has a coupon of 7% and is priced to yield 5.4%. If similarly rated bonds are being issued today with coupons of 5%, it would be expected that the client's bond A) has a positive net present value B) has a zero net present value C) will be selling at a discount from par D) has a negative net present value

A) has a positive net present value With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). We are told that this bond is offering a yield of 5.4%, which is more than the current market rate. Because a present value computation using a 5.4% rate would reflect a lower value than a 5% rate (the higher the discount rate, the lower the value), the bond can be purchased at a price below its present value. Any time that occurs, the instrument has a positive net present value (the difference between the price and the present value).

The present value of a dollar A) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future B) cannot be calculated without knowing the level of inflation C) is equal to its future value if the level of interest rates stays the same D) is the amount of goods and services the dollar will buy in the future at today's rate price level

A) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future Explanation The present value of a dollar will indicate how much needs to be invested today at a given interest rate to equal a cash amount required in the future.

In general, one would prefer to purchase a bond when its current market price is A) less than its present value X B) more than its present value X C) the same as its present value X D) less than its future value

A) less than its present value When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV.

If a stock has a beta of less than 1.0, the stock's price will A) not increase as much as the market when the market is up B) decrease regardless of whether the market is up or down C) increase more than the market when the market is up D) decrease more than the market when the market is down

A) not increase as much as the market when the market is up Beta compares a stock's price history to the movement of a total market index for the same period. A beta of less than 1 means that the stock's price does not swing as widely, up or down, as the average for the entire market

When a bond's NPV is zero, it is usually an indication that A) the market is highly efficient. X B) the bond is a zero-coupon bond. X C) the bond is mispriced. X D) the bond is highly rated.

A) the market is highly efficient. An NPV of zero indicates that there is no difference between the bond's present value and its current market price. That usually indicates a highly efficient market.

Twelve years ago, an investor placed $2,500 into an account. The account is now worth $10,000. Using the Rule of 72, you can determine that the approximate annual return was A) 400%. B) 12%. C) 6%. D) 36%.

B) 12% Under the Rule of 72, we can determine an earnings rate by dividing 72 by the number of years it takes for money to double. In this case, the money had quadrupled. That means it has doubled twice in 12 years or, every 6 years. Dividing 72 by 6 years results in an annual return of 12%.

Twelve years ago, an investorplaced $2,500 into an account. The account is now worth $10,000. Using the Rule of 72, you can determine that the approximate annual return was A) 400%. B) 12% . C) 6%. D) 36%.

B) 12% Under the Rule of 72, we can determine an earnings rate by dividing 72 by the number of years it takes for money to double. In this case, the money had quadrupled. That means it has doubled twice in 12 years or, every 6 years. Dividing 72 by 6 years results in an annual return of 12%.

An agent is analyzing the financial statements of a corporation. The company has cash on hand of $2 million, accounts receivable of $500,000, accounts payable of $700,000, land valued at $3 million, wages payable of $300,000, goodwill of $100,000, inventory of $1.5 million, and retained earnings of $5 million. From this information, the agent would determine that the acid-test ratio for this company is A) 4:1 B) 2.5:1 C) 3.375:1 D) 1:1

B) 2.5:1 The acid-test, or quick, ratio is all of the current assets, except for inventory, divided by the current liabilities. The non-inventory current assets are the cash on hand and the accounts receivable. The current liabilities are the accounts payable and wages payable. This results in a calculation of $2.5 million divided by $1 million, or 2.5:1.

If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is A) 20% B) 40% C) 4% D) 25%

B) 40% Dividend payout ratio is determined by dividends paid per share divided by earnings per share. In this case, earnings per share (EPS) is $50 million/ 10 million shares = $5 per share. The company paid out in dividends $2 for each $5 earned for a 40% payout ratio ($2/$5).

Cecil has a discretionarily-managed account with Pelf Reliable Advisors (PRA), an investment adviser registered in States C, D, and G. Over the past year, the portfolio produced a 12% return with a beta of 1.05. The risk-free rate is 3.5%, and the overall market returned 10.85%. Based on this information, calculate alpha and determine if PRA added any value to the portfolio. A) Alpha= -1.21%; the adviser underperformed the market by 1.21% B) Alpha= 0.78%; the adviser outperformed the market by 0.78% C) Alpha = 1.15%; the adviser outperformed the market by 1.15% D) Alpha= 0.78%; the adviser underperformed the market by 2.72%

B) Alpha= 0.78%; the adviser outperformed the market by 0.78% The alpha for this portfolio is 0.78% (rounded), calculated as follows: 12%-[3.5% + 1.05(10.85%- 3.5%)] = 12% [3.5% + 7.7175] = 12% - 11.2175 = +0.7825. A positive alpha indicates that the investment adviser outperformed the market on a risk-adjusted basis. The correct answer may also be calculated as follows: [12%-3.5%]- [1.05 (10.85% - 3.5%)]: 8.5% - [1.05 X 7.35%]: 8.5% - 7.72%: +0.78.

Which ratio would be looked at to determine the liquidity of a corporation? A) Dividend payout B) Current C) Debi/equity D) Price/earnings

B) Current A company's current ratio is their current assets divided by their current liabilities. If their current ratio is strong, they have a highly liquid position.

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Gross profit divided by net sales B) Current assets divided by current liabilities C) Net income divided by average total equity D) Dividend divided by earnings per share

B) Current assets divided by current liabilities Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders.

Your client has $10,000 to invest and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following items will help determine whether the investment is likely to satisfy the client's goal? A) Present value B) Expected cost of college C) Consumer Price Index D) Client's marginal federal income tax bracket

B) Expected cost of college To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. While the investment will be worth $25,181.70, this may not be enough to pay for even one year of college 12 years from now.

Which of the following statements regarding investment theory is not correct? A) Combining two stocks with a negative correlation coefficient can significantly reduce the portfolio's standard deviation. B) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. C) A correlation coefficient of 0.14 between the returns of Stock C and Stock L indicates that very little of Stock C's returns can be attributed to the returns of Stock L. D) In a well-diversified portfolio, diversifiable risk is zero.

B) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfoliothat is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation) and the closer the correlation coefficient gets to zero (and 0.14 is close), the more random the relationship between the returns earned by two securities.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following EXCEPT A) cash B) convertible bonds it has issued C) marketable securities of other companies D) accounts receivable

B) convertible bonds it has issued The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

As the correlation between any 2 assets decreases, A) greater risk is assumed B) the benefits of diversification increase C) the benefits of diversification decrease D) the standard deviation of the portfolio increases

B) the benefits of diversification increase The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

A company's current ratio is .5:1. This could be an indication A) the company's working capital is sufficient to meet daily needs. B) the company may have trouble paying its bills. C) the company is highly leveraged. D) the company's current assets are twice its current liabilities.

B) the company may have trouble paying its bills. The formula for current ratio is the current assets divided by the current liabilities. A .5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills.

If an investment can be expected to return 8%, using the rule of 72, what is the present value needed to have $50,000 for a child's education in 18 years? A) $6,250 B) $2,777 C) $12,500 D) $25,000

C) $12,500 Under the rule of 72, dividing 72 by the expected return shows the number of years it will take for a deposited sum to double. 72 divided by 8 equals 9 years. Over an 18-year period, there will be 2 doublings. So, dividing the future value ($50,000) by 4 solves for the present value required

Assume Frank has a portfolio with an actual return of 10.50% for the past year. The portfolio beta equals 1.25, the return on the market equals 9.75%, and the risk-free rate of return equals 3%. Based on this information, what is the alpha for Frank's portfolio and did it out outperform or underperform the market? A) +9.1875%, outperform B) -1.6875%, underperform C) -0.9375%, underperform D) +3.3750%, outperform

C) -0.9375%, underperform The formula for alpha: alpha= (actual return - risk-free rate)- (beta x (market return - RF])]. If we plug in the numbers, we get (10.5% - 3%)- (1.25 x [9.75% - 3%]) = 7.5% - (1.25 x 6.75) = 7.5% - 8.4375 = -.9375 The alpha for Frank's portfolio equals -0.9375%, indicating that his portfolio underperformed the market based on the level of assumed investment risk.

A financial analyst computing the current ratio of a company whose stock trades on the Nasdaq Stock Market would use which of the following components? A) Rent B) Operating income C) Current liabilities D) Accounts receivable

C) Current liabilities There are two components to the current ratio formula: current assets and current liabilities. Although accounts receivable are a current asset, the component in the formula is current assets.

All of the following statements about the price-earnings (PE) ratio are true EXCEPT A) it is computed by dividing the current market price of the common stock by the earnings per share B) young, fast-growing companies generally have higher P/E ratios than mature, slower-growth companies C) a company's stock will have a relatively high P/E ratio if investors feel the company's earnings will grow slowly D) a company's P/E ratio may also be called its multiple

C) a company's stock will have a relatively high P/E ratio if investors feel the company's earnings will grow slowly A company's P/E ratio, also called its multiple, may indicate investors' expectations about the company's earnings potential. A higher PE generally indicates that investors have high expectations for the company's future growth. Young, fast-growing companies generally have higher P/E ratios than mature companies.

The time value of money is part of the computation for A) the after-tax return B) the real rate of return C) the internal rate of return D) the risk-adjusted return

C) the internal rate of return One of the unique features of IRR is that it is a compounded rate using the time value of money

The XYZ Corp's income statement contains the follwoing information: Total revenue $200,000 Cost of goods sold 60,000 Adminstrative expenses 30,000 Depreciation 10,000 Misc expenses 3,000 Taxes paid 5,000 Based on the information, XYZ's gross profit is A) $97,000 B) $110,000 C) $100,000 D) $140,000

D) $140,000 Gross profit, or gross margin, is sales (or revenues) minus the cost of goods sold (COGS). When the depreciation expense relates to the equipment used directly in the production of the sales, it is included in COGS. In this question, there is no choice of $130,000 (which would include depreciation in COGS). Clearly, by not including that choice, NASM is taking the position that depreciation is excluded from COGS.

One of your clients has $150,000 in his 401(k) plan at work. He is assuming the portfolio will increase in value at a rate of 7% compounded annually for the next 5 years. If that is the case, the portfolio value at the end of that 5-year period will be closest to A) $160,500 B) $202,500. C) $240,867. D) $210,383

D) $210,383 This is a straight forward future value computation. The proper way to do this is to enter the beginning value ($150,000) into your calculator, and then multiply times 107% five consecutive times. We'll get you started: 150,000 x 107% = $160,500 x 107% = $171,735 x 107% = $183,756 (and do this 2 more times to get $210,383). If that is too challenging, then use the "shortcut" - it always works. Figure the answer using simple interest. The starting value is $150,000. Seven percent growth is $10,500. Do that for 5 years and it is $52,500. Add that to the initial value and you have $202,500. Then, select the next highest number because that takes into consideration the compounding effect.

An agent is analyzing the financial statements of a corporation. The company has cash on hand of $2 million, accounts receivable of $500,000, accounts payable of $700,000, land valued at $3 million, wages payable of $300,000, goodwill of $100,000, inventory of $1.5 million, and retained earnings of $5 million. From this information, the agent would determine that the acid-test ratio for this company is A) 3.375 : 1 B) 4 : 1 C) 1 : 1 D) 2.5 : 1

D) 2.5:1 The acid-test, or quick, ratio is all of the current assets, except for inventory, divided by the current liabilities. The non inventory current assets are the cash on hand and the accounts receivable,.-The current liabilities are the accounts payable and wages payable. This results in a calculation of $2.5 million divided by $1 million, or 2.5:1.

ABD Corporation's income statement reports net sales of $100 million; cost of goods sold, $60 million; administrative costs, $20 million; and interest on debt, $5 million. Based on this information, ABD's gross margin is A) 15% B) 35% C) 20% D) 40%

D) 40% Gross margin, sometimes referred to as gross profit on the exam, is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. In this case, the computation is $100 million minus $60 million, which equals $40 million, and then dividing that by the $100 million resulting in a gross margin (or margin of profit) of 40%. Administrative costs and interest are not included in COGS.

To make a quantitative evaluation using the present value computation, which of the following is NOT needed? A) Time period involved B) Anticipated rate of return of the portfolio C) Account value at the end of the period D) Account value at the beginning of the period

D) Account value at the beginning of the period Present value is calculated to determine the amount required now to have a specified value at some time in the future. It is what we are looking for so we don't have it now.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, I. Kapco's P/E ratio has decreased . II. Kapco's P/E ratio has increased Ill. an investor holding Kapco over this period would have noticed a decrease in income received IV. an investor holding Kapco over this period would have noticed no change in income received A) II and IV B) I and Ill C) II and Ill D) I and IV

D) I and IV At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.).At the end, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends

Present value is a computation that is frequently used to determine the amount of a deposit needed now to meet a future need , such as a college education. If an investor uses an expected return of 8% but the actual return over the period is 10%, the future value will be A) the same as anticipated B) too varying to tell C) lower than anticipated D) higher than anticipated

D) higher than anticipated Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).

A securities analyst wishing to determine the cash flow for the Lucre Bread Manufacturing Company would find the necessary information on the company's A) capitalization statement. B) balance sheet. C) property tax return. D) income statement.

D) income statement The primary source for the information necessary to construct a cash flow statement is the company's income statement. In a similar fashion, if an investment adviser wants to determine a client's cash flow, you would help the client prepare an income statement and work from that. Although the balance sheet shows cash on hand, that is only at that moment in time and doesn't indicate the 'flow" in and out.

In general, one would prefer to purchase a bond when its current market price is A) the same as its present value B) more than its present value C) less than its future value D) less than its present value

D) less than its present value When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV.

All of the following ratios are measures of the liquidity of a corporation except A) the quick ratio. B) the acid-test ratio. C) the current ratio. D) the debt/equity ratio.

D) the debt/equity ratio. Explanation The debt/equity ratio is a measurement of the leverage employed in a corporation's capital structure. It compares the total long-term debt to the total capitalization (long-term debt plus equity capital).

All of the following ratios are measures of the liquidity of a corporation except A) the quick ratio. B) the acid-test ratio. C) the current ratio. D) the debt/equity ratio.

D) the debt/equity ration The debt/equity ratio is a measurement of the leverage employed in a corporation's capital structure. It compares the total long-term debt to the total capitalization (long-term debt plus equity capital).

An investor is looking at the past performance of a security over the past 5 years. The chart looks like this: 2013 10% 2014 15% 2015 3% 2016 11% 2017 6% The average returnover this period is 9%. This would be properly referred to as A) the internal rate of return B) the median return C) the arithmetic mean D) the geometric mean

D) the geometric mean When a true average return is shown, that is the arithmetic mean. The median return (the number in the middle of the group of 5) is 10%.

Your client wants to have $1 million in her investment account when she retires at age 70. She is currently 50 and has about $215,000 available to invest today. You tell her that if the portfolio can earn at a compounded rate of 8%, she will reach her goal. That 8% rate is A) the present value rate B) the market rate of return C) the future value rate D) the internal rate of return

D) the internal rate of return The internal rate of return is the earnings rate required to reach a specified future value from an amount that is currently available to invest. This is a future value computation, but there is no such term as future value rate

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is A) the price-sales ratio B) the price-earnings (PE) ratio. C) the dividend discount ratio D) the price-to-book-value ratio

D) the price-to-book-value ratio The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

Hermon Industries is operating in a sector where the average prospective price-to-earnings ratio is currently eight times. If Hermon's earnings per share (EPS) are expected to be $0.30 per quarter, the implied value of a Hermon share is closest to A) $8.00. B) $2.40. C) $7.70. D)$9.60

D)$9.60 The P/E ratio is the relationship between the market price and the annual earnings per share. Because this question stated the quarterly earnings, they must be multiplied by 4 to get to the $1.20 annual rate. Therefore, the shares should be selling at 8 x expected EPS = 8 x $1.20 = $9.60.