FIN324 Final

What prompted the establishment of the SEC? a. The 1929 stock market collapse b. The 1929 stock market collapse, the abuses associated with stock trading and the Great Depression c. The 1929 stock market collapse, the abuses associated with stock trading d. , the abuses associated with stock trading and the Great Depression

b

Which assumption is the precursor to a financial statement analysis? a. SEC has verified the audits b. Statement is not fraudulent c. Accounting is similar among the competition d. Statements are prepared by a Big Six accounting firm

b

Which is the principle flaw of the SEC disclosure system? Select one or more: a. SEC fails to encourage a sufficient level of marketing materials in the issuer's prospectus b. Issuer disclosure documents are written in legalistic jargon c. SEC does not verify the facts contained in the issuer's prospectus d. SEC regulations do not cover over-the-counter issues

b

Why do "real life" practitioners tend to favor the "relative value" approach? a. Real practitioners look at relative value, the way they look at intrinsic value b. Relative value is based on actual, and verifiable statistics, whereas intrinsic value is based on subjective projections and arguable discount rates. c. Intrinsic value analysis is not used anymore d. It is the only game in town

b

As per the book what are the valuation approaches that dominate the stock market? a. Intrinsic Value, Relative Value, Acquisition Value, Break-up Value b. Intrinsic Value, Relative Value, Break-up Value c. Intrinsic Value, Relative Value, Acquisition Value, Technical d. Intrinsic Value, Relative Value, Acquisition Value

c

The Security Market Line (SML) is a. the line that is tangent to the efficient frontier of all risky assets. b. also called the Capital Market Line c. the line that represents the expected return-beta relationship. d. the line that describes the expected return-beta relationship for well-diversified portfolios only. e. also called the Capital Allocation Line.

c

What is the importance of following a strict methodology in preparing a research report? a. A consensus report must adhere to a prepackaged outline b. Institutional investors demand a set format c. The methodology provides a discipline that reduces the chances of a faulty conclusion

c

What is the principal weakness of the discounted cash dividend valuation approach? a. The approach is dependent on arguable discount rates. b. The approach is heavily dependent on financial projections c. The approach is heavily dependent on uncertain financial projections and arguable discount rates.

c

Which of the following is NOT a cyclical company? a. Paper Manufacturing b. Aluminum Processing c. Cigarette Manufacturing d. Home building

c

Which statement about portfolio diversification is correct? a. Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return. b. The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased. c. Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate. d. Proper diversification can eliminate systematic risk and increases return. e. Proper diversification can eliminate systematic risk.

c

What are the main components of an "appropriate financial investigation"? Select one or more: a. Fraud Investigation b. Valuation Analysis c. Dialogue with firm's financial executives d. Review of the financial Statements e. Meticulous study of the footnotes

c, d, e

An underpriced security will plot a. below the Security Market Line b. either above or below the Security Market Line depending on its covariance with the market. c. either above or below the Security Market Line depending on its standard deviation d. above the Security Market Line. e. on the Security Market Line.

d

Efficient portfolios of N risky securities are portfolios that a. are formed with the securities that have the highest rates of return regardless of their standard deviations. b. have the lowest standard deviations and the lowest rates of return. c. are selected from those securities with the lowest standard deviations regardless of their returns. d. have the highest rates of return for a given level of risk. e. have the highest risk and rates of return and the highest standard deviations.

d

In most break-up evaluations, the divisional valuation process relies heavily on the relative value technique, as opposed to the discounted cash flow method. Why? a. Discounted Cash Flow has too many uncertainties regarding projections and discount rates b. Relative value is amore accurate method of assessing divisional pricing in the private market. c. Analysts cannot properly estimate the amount of corporate overhead allocable to the divisions d. SEC reports do not provide full disclosure regarding divisional financial results, thus making cash flow forecasts problematic.

d

Market risk is also referred to as a. systematic risk, diversifiable risk. b. unique risk, nondiversifiable risk. c. unique risk, diversifiable risk. d. systematic risk, nondiversifiable risk e. firm-specific risk.

d

The expected return of a portfolio of risky securities a. is the weighted sum of the securities' covariances b. is the weighted sum of the securities' variances and covariances. c. is the sum of the securities' returns. d. is a weighted average of the securities' returns. e. . is both a weighted average of the securities' returns and a weighted sum of the securities' variances and covariances.

d

The first step of the analysis begins with a written review of the company's business. As per the book, this review can be described as a. focused b. complete c. detailed d. Descriptive and analytical

d

The systematic approach outlined in Exhibit 7-3 is widely accepted in the investment industry. Why? a. It insures that valuation is closely tied to a business' prospects b. it requires a "comparative company" analysis to include equity pricing as well as financial forecasts c. it forces the analyst to study all factors influencing a company's competitive advantage d. all of the above

d

What are the three components of a LBO as per the LBO document "anatomy of an LBO" on Coursesite? a. Leverage + buy-out + Pricing b. Leverage + Leverage + Leverage c. Leverage + pricing + Management d. Leverage + Control + public/private

d

Which of the following tactics is not directed at exaggerating a corporation's accounting sales? a. Selling to uncreditworthy customers b. Selling goods on unrealistic terms c. Pushing sales orders into an earlier quarter d. Overstating warranties and returns

d

Which statement is not true regarding the market portfolio? a. It includes all publicly traded financial assets. b. It lies on the efficient frontier c. All securities in the market portfolio are held in proportion to their market values d. It is the tangency point between the capital market line and the indifference curve. e. it lies on a line that represents the expected risk-return relationship Feedback

d

Who introduced Modern Portfolio Theory in 1952? a. Jack Treynor b. Harry Markowitz c. William F. Sharpe d. Jan Mossin

d

Who introduced the CAPM formula between 1961 and 1966? a. William F. Sharpe b. Jan Mossin c. John Lintner d. All of them e. Jack Treynor

d

Why do many software development firm shares at large premiums to book value per share when manufacturing companies with similar earnings trade at a more modest price to book multiples? a. all of the above b. Most software firms have employed large R&D write-offs that reduce book value c. Software firms use very high debt leverage, thus reducing book value per share and inflating the price to book value d. Software development requires few fixed assets in relation to potential earnings power?

d

Which statements are relevant to security analysis? Circle all that apply Select one or more: a. Security analysis is a science, like chemistry or physics b. Over the long term security analysis does not offers above average investment returns c. Emotions are not short-to-intermediate term influences on stock prices d. Security analysis depends on rational behavior over the long-term

d only

The Capital Allocation Line provided by a risk-free security and N risky securities is a. the line that connects the risk-free rate and the global maximum-variance portfolio of the risky securities. b. the horizontal line drawn from the risk-free rate. c. the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. d. the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier e. the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

e

Which two of the following four statistics were most supportive of Home Depot being the best do-it-yourself retailer in 1987? Select one or more: a. Growth in same store sales b. Current ratio c. Inventory turnover d. Earnings per share growth

a and d

Why do financial statements rely on the judgement, integrity, and competence of those who make them? a. Financial statements are not hard and fast book entries. Many judgments are involved. b. Financial statements are straight forward c. Financial statements are basic book entries. Not many judgments are involved.

a

Working with LBO Pricing model, What happens when you increase the interest coverage? a. You can offer less for the LBO target b. No impact c. you can offer more for the LBO target d. You need more information to decide

a

Brooksley Born

-American attorney and former chairperson of the Commodity Futures Trading Commission -fought for regulations on derivatives -advocate for financial wellness of the general public

Jim Simons

-American mathematician -the founder of Renaissance technologies -most successful investor of all time

Harry Markopolos

-former securities industry executive, who is currently a forensic accountant and financial fraud investigator -first one to suspect Bernie Madoff of fraud (whistleblower)

Rajat Gupta

-senior partner emeritus of McKinsey & Company -accused of leaking insider secrets about Berkshire Hathaway investment (jail for 2 years, wrongly accused?)

Carmen Segarra

-supervisor for the New York federal reserve that was monitoring Goldman Sachs in 2011 (fired) -reported a conflict of interest in Goldman even though Fed told her not to

Which of the following research report sections are not the responsibility of the security analyst? Select one or more: a. Macroeconomic forecasts b. Company business analysis c. Stock market prospects d. Review of the company's historical results e. Application of valuation methodologies

a and c

Do most growth companies generate excess cash from operations? True (yes) False (no)

False

Operating Leverage involves debt True False

False

What is stronger: fear or greed?

Fear

Working with the LBO model. Which cell(s) can you change in order to increase the LBO per share value? multiple answers allowed Select one or more: a. Reduce Debt/Equity ratio b. Increase EBIT c. Lower EBIT / Int. Exp. d. Increase the number of share

a and c

The efficient frontier of risky assets is a. the portion of the investment opportunity set that lies above the global minimum variance portfolio. b. the portion of the investment opportunity set that represents the highest standard deviations. c. the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation d. the set of portfolios that have zero standard deviation. e. both the portion of the investment opportunity set that lies above the global minimum variance portfolio and the portion of the investment opportunity set that represents the highest standard deviations.

a

A strategy of investing in high P/E ratio does not produce higher return than investing in low PE ratios True False

True

Is Financial statement analysis becoming a lost art? True False

True

The typical Fund is paid in which of the following ways: a. The fund annually receives a fixed percentage fee, based on the market value of assets under management b. The fund receives a variable fee, based on relative investment performance and portfolio size c. The fund receives a fixed rate, plus a bonus based on achieving performance targets d. The fund receives a fixed percentage of profits on assets under management

a

What is the expected return of a zero-beta security? a. The risk-free rate. b. The market rate of return c. A return much higher than the risk-free rate d. Zero rate of return. e. A negative rate of return.

a

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of a. beta risk b. unsystematic risk. c. . unique risk d. reinvestment risk e. interest rate risk

a

Firm-specific risk is also referred to as a. diversifiable risk, unique risk b. diversifiable risk, market risk. c. nondiversifiable, market risk. d. systematic risk, market risk e. systematic risk, diversifiable risk.

a

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is Select one: a. beta. b. variance of returns c. skewness. d. standard deviation of returns. e. unique risk.

a

The definition of a distressed company includes which of the following firm(s)? a. All of the above b. Companies showing consistent negative EBIT on a GAAP basis c. Companies showing consistent net losses on a GAAP basis d. Bankrupt Companies

a

Which of the following accounting entries is based on the educated judgments of management and the independent auditor? Circle all that apply: Select one or more: a. Amortization b. Interest Expense c. Short-Term Loans d. Reserve for bad debts e. Depreciation

a, d, e

A break-up valuation analysis is best performed for which kind of company? Select one or more: a. A company with substantial unrealized real estate values that are not reflected in historical accounting reports b. A diversified conglomerate with several unrelated product lines c. A company with core businesses that complement each other well d. A company that is consistently losing money and is a takeover candidate

b

A statistic(s) that measures how the returns of two risky assets move together is: a. . covariance. b. both covariance and correlation. c. variance. d. . correlation. e. standard deviation.

b

Based on the perpetuity formula, how much is $1,000 received every day worth today at 10%? a. 1,000 b. 10,000 c. A lot of money d. Not enough information provided to conclude

b

Companies should try to achieve a diversified list of customers, with no one customer representing more than 10% of sales. Why? a. because it needs to diversify b. because If a dominant customer goes bankrupt or withdraws its business, an undiversified firm could face serious problems c. because it can offer more products d. because it can offer more services

b

For a gasoline station operator such as Exxon, which one of the following four areas of marketing strategy is likely most important? a. Return policy b. Pricing c. Service d. Geographic coverage

b

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks? Select one: a. +1.00 b. -1.00 c. 0.00. d. -0.65. e. +0.50.

b

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is a. unique risk. b. market risk c. . standard deviation of returns. d. variance of returns. e. . semi-variance.

b

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is a. unique risk. b. systematic risk. c. . standard deviation of returns d. variance of returns e. semi-variance

b

List the four key characteristics of a prime leveraged buyout candidate a. High Tech, Solid Track Record, Hard Assets, Low Indebtedness b. Low Tech, Solid Track Record, Hard Assets, Low Indebtedness c. Low Tech, Solid Track Record, No Valuable assets, Low Indebtedness d. Low Tech, Solid Track Record, Hard Assets, High Indebtedness

b

What are the most popular ratios for a distressed company "bottoms up" screen? Circle one answer a. Price Book, EV/EBITDA, Price / Cash Flow b. EV/EBITDA, EV/Sales, Price/Book c. Price/EBITDA, P/E, Price Book d. P/E, EV/EBITDA, Price/Book

b

What is the difference between the "sell side" and the "buy side" analyst? a. The "sell side" refers to institutional investors such as mutual funds and pension funds. The "buy side" refers to brokerage houses. b. The "buy side" refers to institutional investors such as mutual funds and pension funds. The "sell side" refers to brokerage houses. c. The "buy side" refers to institutional investors such as brokerage houses.. The "sell side" refers to mutual funds and pension funds

b

What is the purported "Chinese Wall" of the typical brokerage firm? How does the protective function of the Wall come to be routinely compromised? a. The Chinese Wall purports to separate the functions within investment banking.The Wall is routinely compromised because the analysts' compensation from investment banking work makes him reluctant to denigrate investment-banking clients of the brokerage firm. b. The Chinese Wall purports to separate the functions of equity research and investment banking.The Wall is routinely compromised because the analysts' compensation from investment banking work makes him reluctant to denigrate investment-banking clients of the brokerage firm. c. The Chinese Wall purports to separate the functions within equity research The Wall is routinely compromised because the analysts' compensation from investment banking work makes him reluctant to denigrate investment-banking clients of the brokerage firm.

b

Diversifiable, unique, nonsystematic, and firm-specific risks are

synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Market, systematic, and nondiversifiable risk are

synonyms referring to the risk that cannot be eliminated from the portfolio.

bottom-up analysis

tells us to focus on an individual company's overall financial health and its fundamentals instead of industry growth and the overall market

Portfolios on the efficient frontier are

those providing the greatest expected return for a given amount of risk. Only those portfolios above the global minimum variance portfolio meet this criterion.

Is "momentum investing" similar to technical analysis? -true or false?

true