7.4 - Investment Analysis

KPT, Inc. is preparing to report its net income for the past year. An increase in the following causes a decrease in the reported net income:

1. Tax rate. 2. Allowance for bad debt Higher taxes mean less net income. The allowance for bad debts is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

Fundamental analysts give significant credence to financial ratios. The following tends to give an indication of the profitability of the enterprise:

C) Sales to earnings ratio. The sales to earnings ratio compares the net sales of the business to its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable.

A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of

B) $18.67 The first thing to do is annualize the dividend by multiplying the $.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of:

B) 16.8%. The formula is the risk-free rate (.04) plus the product of the stock's beta (.8) and the difference between the expected return on the market and the risk-free rate(.20 - .04). In this case, it would be .04 + .8(.16) or .04 + .128 = .168

Under SEC rules, Form 8-K must be filed:

B) within four business days of the event. Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is four business days.

The following stocks, which would be the most suitable for a conservative, risk averse investor:

D) Large cap consumer goods company. A large-cap consumer goods company is most appropriate for a risk averse investor because of the relative stability of the stock price compared to the other choices, as well as the stability of its earnings.

The following stocks is regarded as a defensive stock:

A) Electric utility stock. Analysts regard a defensive stock as one that is in an industry that is least affected by business cycles. Most defensive industries produce nondurable consumer goods (for example, the food industry or the utility industry).

The following is most likely to be regarded as a defensive stock:

B) A food company stock. A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly.

The following industries would tend to be the most cyclical:

B) Appliance manufacturers. "Cyclical" refers to whether the industry is affected by business cycles of the economy. Items such as luxuries and large-ticket items (autos, homes, appliances) are normally cyclical. Food and tobacco are normally not cyclical.

When an analyst subtracts the inventory from a company's current assets and divides the remainder by the current liabilities, the result is the:

C) quick ratio. The quick ratio, sometimes called the acid-test ratio, is computed by taking a company's current assets minus the inventory and then dividing that by the current liabilities.

A corporation's balance sheet reveals cash of $100,000, accounts receivable of $20,000, and equipment of $300,000, resulting in total assets of $420,000. The document also shows accounts payable of $100,000, long-term liabilities of $200,000, and equity of $120,000. From this information you would determine the working capital to be:

D) $20,000.00 Working capital is computed by subtracting current liabilities (accounts payable) from current assets (cash plus accounts receivable). In this case, it is $120,000 − $100,000 = $20,000.

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

D) -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.

A technical analyst would be most interested in the following

D) 200-day moving averages. Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

The following equations correctly shows the relationship between the items on a company's balance sheet:

D) Assets = liabilities + stockholders' equity. The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

Which ratio would be looked at to determine the liquidity of a corporation?

D) 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.

Which of the following would be considered a defensive security:

1) Tobacco stock. 2) Utility company stock. 3) Food chain stock. Steel is cyclical and is not considered defensive; defensive stocks are generally less affected by the business cycle.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt to equity ratio is:

A) 28.6%. The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%.

A head and shoulders bottom formation is an indication of:

A) the reversal of a downtrend. A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration.

If disposable personal income has fallen steadily over the past year, the following is most likely to be affected:

B) Automotive industry. The automobile industry is cyclical and of the choices, the most likely to be affected by a change in the business cycle as indicated by declining personal income.

To reduce a client's exposure to systematic risk in his equity portfolio, you would look at the following:

B) Beta. Beta is a measure of a portfolio's volatility compared to the volatility of the overall market. Since systematic risk is risk associated with investing in the market, lowering the client's volatility (beta) relative to that of the market should lower his exposure to market risk. Credit rating is used to measure default risk on debt securities, and earnings history would assist you in the measurement of business risk (unsystematic risk).

A company using debt obligations to finance business expansion is indicative of what type of investment risk?

B) Credit or default risk. A company using borrowed capital to expand is increasing its financial leverage. As such, the possibility of default increases. Investors can reduce their risk either by diversifying into companies using minimal leverage or selecting those issuers with higher credit ratings. The other risks noted are systematic or nondiversifieable risk.

The Capital Asset Pricing Model (CAPM) is most commonly used to determine an investor's:

B) expected return. The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return.

Many businesses choose to use a date other than December 31st to close out their financial year for accounting purposes. When this is done, it is said that the entity is reporting on a:

B) fiscal year basis. Fiscal year accounting uses a date other than December 31st as its year-end.

A securities analyst reviewing a corporation's financial statements notes that the enterprise has total current assets of $10 million, inventory of $4 million, cash on hand of $2 million, total current liabilities of $8 million and net income of $15 million. The company's acid-test ratio is closest to

C) .75 to 1 The acid-test ratio, also known as the quick asset ratio, is computed by subtracting the inventory from the total current assets and then dividing that remainder by the total current liabilities. In this case, that would be $10 million minus $4 million ($6 million) divided by $8 million, or .75%

Some risk is involved in almost all investments. In general, the greater the risk, the:

D) greater the potential return. Risk and potential return tend to go together. Low risk investments usually produce low returns. High risk investments offer the hope of high returns.

According to the efficient market hypothesis, information found when reading the Wall Street Journal would be considered:

C) weak. The closer to inside information, the stronger the information. Anything published in widely read media would be considered very weak.

When a company's debt to equity ratio is higher than typical for that industry, it might be said that the company is:

D) highly leveraged. The definition of a leverage is the use of borrowed money in the issuer's capital structure. This is seen through the debt to equity ratio. When that ratio is higher than industry standards, it is said that the company is highly leveraged.

What is the term given to that item, typically found at the bottom of a corporation's balance sheet, that describes such things as significant accounting policies, commitments made by the company, and potential liabilities and potential losses?

D) footnotes. Footnotes to the balance sheet, describing unusual items, are typically found at the bottom of the statement.

An analyst wishing to check on the most recent financial performance of an SEC registered issuer would probably examine the:

D) Form 10-Q. Financial reporting is done on Forms 10-K and 10-Q; the former on an annual basis, the latter, quarterly. Therefore, the most recent information is going to be on the Form 10-Q.

Beta is most frequently measured against the following:

D) S&P 500. The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less than 1.0 should show a rate of change less than that of the market as a whole.

The following would best describe working capital:

D) The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities. Working capital equals current assets minus current liabilities.

Working capital is:

D) current assets - current liabilities. Current means cash or assets that would be exchanged for cash in the ordinary course of business in the current year. In the case of liabilities, current means maturing or falling due within the current year. The net of current assets less the current liabilities implies the company has cash availability of the remainder with which to work.

If an analyst wished to determine the degree to which leverage was being employed by a subject company, she would most likely examine that issuer's:

D) debt to equity ratio. The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. The higher the ratio, the more leverage being used by the company.

KAPCO, Inc. is listed on the NYSE. When computing their book value per share, an investment adviser would be sure to consider:

1. goodwill. 2. long-term debt. 3. retained earnings. 4. par value of the preferred stock. The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt) as well as the retained earnings. Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill.

The following expense items increases a company's cash flow:

A) Depreciation. The basic computation for cash flow is net income plus depreciation expense for that year.

The following are likely to have a low beta:

A) Public utility stocks Public utility stocks tend to have low betas as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas.

If a company successfully gets its 7% debenture holders to exchange their 7% debentures for 7% preferred stock, what is the effect on EPS?

B) Decrease. The 7% payment is moved from a pre-tax deduction to an after-tax payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.

When a member of the board of directors of a publicly traded company resigns due to a disagreement over an operational matter,

A) Form 8-K must be filed with the SEC within four business days of the event The Form 8-K is used to report significant events of importance to investors. Examples would be the resignation of a member of the board because of an operational dispute, liquidation of a significant asset, filing for bankruptcy, or change in management control. When any of these occur, the Form 8-K must be filed with the SEC no later than four business days after the event. The Form 10-K is the company's annual filing and that is due, depending on the size of the company, 60 to 90 days after the end of the fiscal year.

If a technician believed in the importance of volume, the following would indicate bullish sentiment:

A) Prices increase on heavy volume. Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

If your customer is pursuing an aggressive stock buying strategy, the following is most suitable for him:

B) GHI stock with a beta coefficient of 1.20. Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta is, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and the temperament to withstand downturns in the market.

The following purchases is most suitable for an investor pursuing an aggressive investment strategy

B) GHI stock with a beta coefficient of 1.3. Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive investment strategies.

XYZ Corporation has a beta of 1 and ABC has a beta of 1.4. XYZ has returned 12% and ABC 18.8%. Based on this information ABC had alpha of

C) 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 18.8%, ABC beat the expected by 2% and that is its alpha.

ALFA Enterprises pays a quarterly dividend of $.15 and has earnings per share of $2.40. Assuming that payout rate is continued, what is the dividend payout ratio?

C) 25%. Earnings per share are typically calculated for a year. If the quarterly dividend rate of $.15 is continued, that will be an annual payout of $.60 ($.15 × 4). So the annual dividend of $.60 is divided by $2.40 to calculate what percentage of earnings is paid as a dividend; or rather, the dividend payout ratio (.60 ÷ 2.40 = 25%).

A stock's beta coefficient is a measure of the stock's:

D) volatility relative to the market. Beta measures a stock's volatility relative to the overall market. A beta above 1 indicates a more volatile stock, while a beta below 1 describes a stock less volatile than the market.

One using fundamental analysis would most likely be employing

D) weak EMH In weak EMH, current stock prices fully reflect available security market information such as volume and price movements. Investors cannot achieve excess returns using tech analysis, but may benefit from using fundamental analysis which looks deeper into the company's potential by examining its financial statements.

Two portfolios have the same expected return of 10%. Portfolio A has a standard deviation of 5% and Portfolio B has a standard deviation of 18%. Under Modern Portfolio Theory (MPT):

A) Portfolio A would be preferred by investors because the portfolio has the same return as Portfolio B but bears less risk. Portfolio A would be preferred by investors because it has the same return (10%) as Portfolio B but bears less risk. One of the assumptions of MPT is that investors prefer less risk rather than more risk per unit of return. Because Portfolio A has a smaller standard deviation than that of Portfolio B, it has less risk. Standard deviation measures the volatility of a security. The larger the standard deviation, the larger the security's returns are expected to deviate from its average return and, hence, the greater the risk.

One of the goals of Modern Portfolio Theory (MPT) is to construct a portfolio that provides the highest return with the lowest risk. This would be known as the:

A) efficient portfolio. According to Harry Markowitz, the founder of MPT, the goal is to craft an "efficient" portfolio. An efficient portfolio is a portfolio that offers the highest expected return for a given level of risk. The line that connects all these efficient portfolios is the efficient frontier. The efficient frontier represents that set of portfolios that has the maximum rate of return for every given level of risk.

That all market participants have equal access to information is a fundamental premise of:

A) the efficient market hypothesis. When all market participants have equal access, the theory is that stock prices will reflect that efficiently.

Publicly traded corporations are required to furnish their stockholders with financial information no less frequently than annually. This is usually accomplished by providing an annual report. In lieu of the annual report, this requirement may be met by the furnishing of a:

B) Form 10-K. Form 10-K is the annual audited financial report to the SEC. It may be used in lieu of the annual report to shareholders.

Issuance of which of the following would most likely increase the leverage in a company's capital structure?

B) bonds. Leverage is the use of borrowed money. This is reflected in a company's debt to equity ratio. Of these choices, the only one that is borrowed money is the bonds.

A review of a corporation's financial statements reveals the following information: Net assets - $50 million Net revenues - $20 million Cost of goods sold - $14 million Depreciation - $1 million Interest - $1 million Long-term debt - $20 million Using the information, the gross margin for the year was

C) 30% The gross margin, or margin of profit, is usually expressed as a percentage. It is the operating profit remaining after subtracting the cost of goods sold from the revenues (sales), divided by those revenues. In this question, the cost of goods sold is $14 million, and that number includes the depreciation. Subtracting $14 million from $20 million results in an operating profit of $6 million, which is 30% of the $20 million in revenues. Please note that, as with so many questions on the exam, there are extra numbers that have no relevance to the question.

The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is:

C) fundamental analysis. There are two main approaches to valuing securities. Fundamental analysis takes the approach described in this question. The other approach-technical analysis-relies on charts of past performance to forecast future price movements.

When analyzing a company's financial statements, gross margin is computed by subtracting from revenues

C) the cost of goods sold A company's gross margin is the profit from operations remaining after subtracting the cost of goods sold from the revenues (sales). Because interest is a fixed rather than operating expense, it is not included in the computation.

An analyst attempting to determine the extent to which financial leverage is being employed by a company would examine the company's

A) debt-to-equity ratio Financial leverage is the use of debt capital. The best way to see the extent to which that exists is through the debt-to-equity ratio.

Those investors wishing to examine a document that would probably give them the most information about an issuer's current and planned operations would seek out the:

B) annual report. The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations, but will also include statement from key personnel dealing with the company's future plans.

An inverted Head and Shoulders Formation would mean the following to a chartist?

C) A reversal of a downtrend. Head and Shoulders Formations indicate the reversal of market trends to chartists. An inverted formation would forecast the reversal of a downtrend. A Head and Shoulder's Top Formation would forecast the reversal of an uptrend.

In a rising market, the following is least volatile:

C) A stock with a beta of 0.5. Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.

A fundamental analyst would be interested in funds available for use in the business. Doing the following would have the greatest impact on future cash flow:

A) Retiring outstanding bonds. The retirement of outstanding bonds means that there will be no future interest payments made. Since a major component of cash flow is a company's net income, this reduced expense would lead to increased income.

The following market analysts is using the efficient market theory:

C) An analyst picks company names out of a hat. Efficient market theory holds that securities are efficiently priced and therefore, it makes no sense to analyze particular stocks; or rather, picking stocks out of a hat is as effective as technical or fundamental analysis.

Recent studies have shown that much of the performance of a portfolio can be attributed to the following factors:

C) Asset allocation. A study conducted by Sharpe and Markowitz revealed that 91.5% of the returns achieved by the average investor were based upon the allocation of assets among various investment classifications. Market timing and security selection did account for some of the remaining percentages, but asset allocation proved to be the most important factor.

The following would appear as assets on a corporation's balance sheet:

1) Prepaid expenses 2) Notes receivable Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

Included in the working capital computation of a corporation are all of the following:

1) cash. 2) accounts receivable. 3) marketable securities of other companies. 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.

An analyst computing an issuer's book value per share would most likely include the value of the company's:

1) cash. 2) wages payable. The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we remove the par value of the preferred stock and do not include the value of intangible assets such as patents.

All of the following ratios are measures of the liquidity of a corporation:

1) current ratio. 2) quick ratio. 3) acid-test ratio. Liquidity ratios measure a firm's ability to meet its current financial obligations and include the current ratio and acid-test (quick) ratio. However, the debt/equity ratio is a capitalization ratio and measures the amount of leverage compared to equity in a company's overall capital structure.

An IA explaining modern portfolio theory (MPT) to a client might make all of the following statements:

1) if two securities offer the same rate of return, choose the one with the lower risk. 2) if two securities offer the same risk, choose the one with the higher return. 3) if one security has a higher return than another and, at the same time has a lower risk, choose it. Higher returns are only justified if the bear a relationship to the added risk. The goal of MPT is to maximize the return for any given amount of risk.

An analyst viewing a corporate income statement will be able to review all of the following:

1) net sales or net revenues. 2) operating expenses. 3) pre-tax income. Current ratio is a balance sheet computation involving current assets and current liabilities. All of the other items relate to income and expenses, items found on an income statement.

Two of the major factors involved in the Capital Asset Pricing Model (CAPM) are

1) risk 2) time CAPM is built on the theory that investors must receive a return commensurate with the amount of risk taken over a specified period of time.

One popular method used to predict the expected return of a stock is the Capital Asset Pricing Model. Analysts using CAPM rely on all of these:

1) risk-free rate available in the market. 2) beta coefficient of the stock. 3) expected return on the market. Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.

If a corporation issues mortgage bonds, all of the following would be affected:

1) total liabilities. 2) working capital. 3) total assets. When issued, the corporation receives the net proceeds in cash, increasing current assets (and thus total assets). Simultaneously, the corporation's long-term liabilities increase reflecting the debt (and thus total liabilities). Working capital increases because of the increase in current assets. Shareholder's equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation.

An issuer of registered securities must file Form 8-K when any of following events occur:

1) when control of the company changes. 2) when a significant amount of assets is disposed. 3) when a member of the board of directors resigns due to a disagreement over an operational matter. An issuer of registered securities must file Form 8K when control of the company changes, a significant amount of assets is disposed, or when one or more members of the board of directors resigns because of a disagreement over an operational matter. A news release by an overseas subsidiary would not require the filing of Form 8K because that is a foreign entity and Form 8-K only deals with domestic companies.

The following would be expected of a growth stock:

1. High price/earnings ratio. 2. Low dividend payout ratio. Growth stocks are stocks of companies that plow their earnings back into further product development. They sell at a high price-earnings ratio and pay out little or nothing as a percentage of their earnings in dividends.

The following are key assumptions of the Capital Asset Pricing Model (CAPM):

1. Investors hold diversified portfolios 2. Investors can borrow and lend at the risk-free rate 3. There is a perfect capital market CAPM assumes that investors will be looking at a return for taking systematic risk, hence holding diversified portfolios. One of the most important assumptions is that investors will be able to borrow/lend at the risk-free rate. Finally, CAPM assumes a perfect capital market, meaning that all securities are valued properly (their returns will plot to the [SML] security market line, and there are no tax or transaction costs). Income taxes are not a consideration, because not all investors are going to be in the same tax bracket.

The following statements regarding a 2-for-1 stock split are TRUE:

1. The share price is reduced by half. 2. The number of shares doubles. In a 2-for-1 stock split, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.

The following statements about the price-earnings (PE) ratio are TRUE

1. Young, fast-growing companies generally have higher PE ratios than mature, slower-growth companies. 2. A company's PE ratio may also be called its multiple. A company's PE 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 PE ratios than mature companies.

A stock has traded in a channel between 50 and 65. A technician might suggest that his client:

1. buy at 52. 2. sell at 63.

One of the offshoots of the capital asset pricing model (CAPM) is the Capital Market Line (CML). The equation for the CML uses the following?

A) Standard deviation The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the: * expected return of the portfolio; * risk-free rate; * return on the market; * standard deviation of the market; and * standard deviation of the portfolio.

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year?

A) Three. The Form 10-Q is used for quarterly financial reporting. However, even though there are four quarters in an accounting year, only three forms are filed. Why? Because the Form 10-K, the annual report, takes the place of the 4th quarterly report.

LMN Manufacturing Company, listed on the NYSE, is an SEC reporting company. Each of the following would require the filing of a Form 8-K:

A) acquisition of a major asset B) a change in top management C) a change in external CPA firm engaged to perform the annual audit D) relocation of wholly owned subsidiary

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend?

A) moving averages. To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes:

B) contain information that doesn't have a place in the main body of the financial statements. There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are; method of accounting used, collateral securing debt, pension liabilities and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements."

In portfolio theory, the alpha of a security or a portfolio is:

B) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the macroeconomic factors that affect all risky assets is systematic risk. The portfolio's average return in excess of the risk-free rate divided by the standard deviation in returns of the portfolio is the Sharpe ratio or measure. The measure of the variance in returns of a portfolio around its average return is the standard deviation.

The following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility):

C) Dow Jones Composite Average. The most widely quoted and oldest measures of changes in stock prices are the Dow Jones averages. They are also the smallest in terms of the number of stocks included in the averages with only 65 stocks.

The following would you most likely consider characteristics of a growth stock:

C) High PE and low dividend yield. Growth stocks generally have high PE ratios and low (or no) dividends. Value stocks normally have low PE ratios with higher dividend payouts.

The following industries would be least cyclical:

C) Supermarket chain. Industrial activity usually follows business cycles, which have more impact on some industries than others. The food industry is one for which the demand is not generally based on economic conditions.

A customer's portfolio has a beta coefficient of 1.1. If the overall market increases by 10%, the portfolio's value is likely to:

C) increase by 11%. A beta of 1.1 means the portfolio is considered to be 1.1 times more volatile than the overall market. If the market is up 10%, the portfolio with a beta of 1.1 is likely to be up 11%.

Form 8-K must be filed by:

D) registered domestic issuers. Form 8-K filings are required for domestic issuers, registered under the Act of 1933, to report newsworthy events to the SEC. Foreign Issuers, ADRs, as well as broker/dealers, are exempt from having to file.

The following items would normally be considered a current asset on a balance sheet:

1) Account receivables. 2) Inventories. 3) Cash. A current asset is an asset that is already cash or that, in the normal course of business, will become cash within one year from the date on the balance sheet. A fixed asset, such as land, is an asset that is used over a long period in the normal course of business and that is not intended for sale.

The following best describe the balance sheet formula:

1) Assets minus liabilities equals net worth. 2) Liabilities plus equity equals assets. A balance sheet basically lists what is owned (assets) and what is owed (liabilities). The difference between these two is the net worth or equity. Sales, expenses, and dividends are all found on the income statement.

The following are affected by the issuance of a bond:

1) Assets. 2) Total liabilities. 3) Working capital. When bonds are issued, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital increases. There is no effect on shareholders' equity because the increased liability is offset by the asset (cash) received.

The following statements about balance sheets are TRUE:

1) Balance sheets provide a snapshot of a company's financial position on a given date. 2) Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement.

The following are sources of cash reported on the statement of cash flows:

1) Cash flows from investing. 2) Cash flows from financing. 3) Cash flows from operations. The statement of cash flows reported by U.S. companies does not contain an entry entitled "cash flows from accounting changes".

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:

1) Kapco's P/E ratio has decreased 2) an investor holding Kapco over this period would have noticed no change in income received. At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, 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.

The following would be considered in the fundamental analysis of a security:

1) Liquidity ratios. 2) Historical earnings trends. Fundamental analysts are concerned with information relating to the economy, industries, and individual companies. A company's liquidity ratios and past earning trends fall within these areas of concern. Concerns about the stock price and volume of trading would be of primary interest to a technical analyst.

In the technical analysis of the value of securities, all ofthe following items are important:

1) Resistance and support levels. 2) The breadth of market volume. 3) A prevailing market trend in response to shifts in supply and demand. The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

The following factors would be considered by an investor who uses fundamental analysis to value a company's stock:

1) The company's financial condition, as revealed by its income statement and balance sheet. 2) General economic conditions, such as employment levels and changes in interest rates. Fundamental analysis attempts to value stock by examining general economic conditions and the company's financial condition and growth prospects. Technical analysis, on the other hand, tries to identify trends and predict changes in the market. Charts showing past price movements and trading volumes would be used in technical analysis but not in fundamental analysis.

The following would be of interest to a chartist:

1) The volume of shares traded during the past month. 2) The short interest. 3) The advance-decline line. A chartist is interested in the volume of shares traded, and the short interest for that particular stock. The advance-decline line is another technical indicator. The price-to-earnings ratio is used in fundamental as opposed to technical (charting) analysis.

The following items change when a company pays a cash dividend:

1) Total assets. 2) Total liabilities. When a dividend is paid, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable.

The issuance of a debenture by a company would have an immediate effect on the following balance sheet items:

1) Total assets. 2) Total liabilities. 3) Working capital. The cash received from the sale of the bonds is a current asset of the company, and as such would increase assets and working capital on the balance sheet. The debentures are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and cash distributions (dividends) to shareholders.

Included in the working capital computation of a corporation are all of the following:

1) accounts receivable. 2) marketable securities of other companies. 3) cash. 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.

All of the following statements would likely be true regarding those who are technical analysts:

1) are not concerned with dividend returns. 2) analyze market movements. 3) are more concerned with short-term trading than long-term investing. A technical analyst is concerned with market prices, trends, and volumes of securities, but not fundamentals such as book value and dividend returns.

A fundamental analyst is concerned with all of the following:

1) capitalization. 2) historical earnings trends. 3) inflation rates. A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and balance sheet ratios. A technical analyst is concerned with trading volumes or market trends and prices.

Current assets on a corporate balance sheet would include:

1) cash. 2) inventory. Cash is the most obvious current asset. The general definition of a current asset is one that is expected to be turned into cash within the year. One would certainly hope that to be true of inventory. Accounts payable and accrued wages are liabilities, obligations that must be paid on a current basis.

A corporation calls in a portion of its long term debt at 101. This will have the effect of:

1) decreasing working capital. 2) decreasing net worth. Working capital is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

If an economist was describing defensive issues, he would probably include companies that produce:

1) food products. 2) clothing. 3) tobacco products. Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.

All of the following appear on a corporation's balance sheet as fixed assets:

1) furniture. 2) computer equipment. 3) real estate. Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period of time. The other choices are fixed assets and cannot be liquidated easily.

Components of a company's net worth would include all of these:

1) goodwill. 2) inventory. 3) fixed assets. Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

Growth companies tend to have all of the following characteristics:

1) high earnings retention ratio. 2) potential investment return from capital gains rather than income. 3) low dividend payout ratios. Growth companies have high PE ratios and a low dividend payout ratio because they retain most if not all of their earnings. Investors anticipating fast growth bid up prices so PE ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

A fundamental analyst would be interested in all of the following:

1) innovations within the automotive industry. 2) statistics of the U.S. Department of Commerce on disposable income. 3) corporate annual reports. Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

A fundamental analyst is reviewing a company's financial statements. When attempting to determine their debt exposure, all of the following would be included:

1) taxes payable. 2) accounts payable. 3) outstanding principal balance on long-term debt. Accounts receivable are assets; all of the other listings represent liabilities of the company

In the assessment of a company's stock, a technical analyst takes into consideration all of the following:

1) volume. 2) market price. 3) price momentum. A market technician (technical analyst) deals primarily with timing of activity and market trends, while a fundamental analyst centers on a particular industry or company within an industry and its relative health and market potential.

The following statements about technical analysis are TRUE:

1. Technical analysis tries to identify trends and predict market changes. 2. Technical analysis is often accomplished by reviewing data in the form of charts. 3. Technical analysis looks primarily at past performance to predict future trends. Technical analysts attempt to identify trends so they can predict market changes. They do this by reviewing past performance as depicted in charts and graphs. The type of analysis that attempts to value stock by examining a company's financial condition and growth potential is fundamental analysis.

The following factors would be considered by an investor who uses fundamental analysis to value a company's stock

1. The company's financial condition, as revealed by its income statement and balance sheet. 2. General economic conditions, such as employment levels and changes in interest rates. Fundamental analysis attempts to value stock by examining general economic conditions and the company's financial condition and growth prospects. Technical analysis, on the other hand, tries to identify trends and predict changes in the market. Charts showing past price movements and trading volumes would be used in technical analysis but not in fundamental analysis.

If a U.S. corporation wishes to issue Eurodollar bonds, the following statements are TRUE:

1. The corporation will not be subject to currency risk. 2. The issue need not be filed with the SEC. Because Eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC.

The following items would change if a company declared a cash dividend:

1. Working capital. 2. Total liabilities. 3. Shareholders' equity. The key word is "declared". Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. The following is CORRECT:

1.Working capital is reduced. 2. Net worth is increased. Even though the bonds are purchased for less than par value, working capital is reduced because the company is using a current asset — cash — to pay off a long-term liability. However, the fact that it is reducing its debt for less than the amount shown on the books will result in an increase to net worth.

A customer purchased 100 shares of SNP at $38. At the time of purchase, the PE ratio was 12. Approximately what are the earnings per share of SNP?

A) $3.20. The PE ratio is a comparison of the current market price at the close to the earnings of the company; $38 (CMV) ÷ 12 (PE ratio) = $3.16 (approximate EPS).

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) 15:01 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.

The following rates of return is used by investment professionals as the risk-free rate:

A) 90-day Treasury bill rate. The interest rate used as the basis for a risk-free rate of return is the 90-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal.

A fundamental analyst would be most interested the following

A) A PE analysis of the stocks included in the Dow Jones Industrial Average. Fundamentalists look at PE ratios; the other tools mentioned are technical.

What is the balance sheet equation?

A) Assets = liabilities + shareholders' equity. Total assets equal total liabilities plus total shareholders' equity.

Under what circumstances will a dilution of equity occur?

A) Conversion of convertible bonds into common stocks. Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

A technical analyst is least likely to consider the following when selecting securities:

A) Corporate earnings. Corporate earnings would be of least interest to a technical analyst, who is interested in market statistics indicative of future buying, market statistics that could reflect price or market trends, and trading volume.

Financial statement analysis frequently relies upon a review of the target company's cash flow statement. To get the most accurate indication of cash flow, an analyst will add which of the following to net income:

A) Depreciation expense. The most common formula for the cash flow from operations computation is net income plus the depreciation expense taken for the year.

Proponents of the following technical theories assume that small investors are usually wrong:

A) Odd lot. Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong.

A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account?

A) Retained earnings. Retained earnings are increased to the extent that company profits (net income) are undistributed; in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

An analyst comparing revenues with expenses is most likely analyzing:

A) cash flow. The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

An investor's portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely:

A) decreased by 8.5%. A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 × .85).

The dividend payout ratio of common stock is found by dividing the annual dividend per share by the

A) earnings per share. The key to the question is "ratio", which in this case is the relationship between dividends per share and their source of earnings per share.

If a corporation has a dividend payout ratio of 70%, the undistributed earnings will:

A) increase retained earnings. Retained earnings represent income that has not been paid out to shareholders.

If the assets of a company did not change, but stockholders' equity declined, it would follow that:

A) liabilities increased. Stockholders' equity equals assets minus liabilities. If assets stay the same, then an increase in liabilities will cause a decline in equity.

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. 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.

Net income:

A) represents the amount of money remaining after all expenses including taxes. Net income is not a cash item that is paid out to stockholders. Dividends, both preferred and common, are generally cash distributions paid out from net income. Net income after taxes can reflect all sources of income in addition to the operating income generated by business activities. Net income also reflects investment income as well as operating income. Net income may be paid out in the form of dividends; however, most firms retain a portion of net income in order to reinvest the funds in the business.

According to technical analysis, when the market is consolidating, a chart showing the market trendline appears to be moving:

A) sideways within a narrow range. A consolidating market is one that stays within a narrow price range. When viewed on a graph, the trendline is horizontal and is said to be moving sideways, meaning neither up nor down.

An individual owns assets worth $500,000 and has debts of $300,000. What is the individual's net worth?

B) $200,000.00 An individual's net worth equals the individual's assets minus his liabilities. Therefore, if someone has assets of $500,000 and debts of $300,000, the person's net worth is $200,000.

SSS Corporation's total assets amount to $780,000 of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity:

B) $410,000.00 Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

XYZ Corporation 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 will be:

B) 15 Before the split, the company 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 PE ratio unchanged (new price = $15, new EPS = $1).

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 (EPS) 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, the current yield on Kapco common stock is:

B) 2% The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50 results in a current return of 2%.

FNK reported earnings of $2.47 per share last year on its stock, which is trading at 24.75. It paid a $.93 dividend on its common stock. What was its dividend payout ratio?

B) 38%. The company earned $2.47 per share and paid a $.93 dividend per share, which is 38% of the earnings ($.93 ÷ $2.47 = 38%).

If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is:

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).

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations.The following is a liquidity ratio:

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.

The following statements is TRUE:

B) Dividends have a significant influence on the value of the corporation's stock. Dividends play a large role in what someone is willing to pay for the stock. For example, the dividend discount model (DDM) values a stock as the discounted present value of future dividends. A company is not required to pay dividends. A growth company will tend to pay no cash dividends but rather use the money for expansion.

This industry would be considered defensive in the face of a recession:

B) Food producer. Defensive industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy. Public consumption of such goods remains fairly steady throughout the business cycle. During recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries.

The following is a stock valuation ratio:

B) Price-earnings. The price-earnings (PE) ratio is a valuation ratio used to calculate the value of a stock. For example, if a stock has a PE of 20, it means that the security is priced at 20 times earnings.

The following would be of least interest to a technical analyst:

C) PE ratio. Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer; PE ratios are of greater interest to fundamental analysts.

In an efficient market:

B) any information that could affect a stock's value is quickly reflected in its price. An efficient market is one in which every individual can quickly obtain and use information about new events in the marketplace. Because information is disseminated quickly, any new information that could affect a stock's value is quickly reflected in its price.

If an investor wanted to verify a company's working capital, she would do so by reviewing their:

B) balance sheet. Working capital, current assets minus current liabilities, is determined from numbers found on the balance sheet.

The measurement that compares a stock's price history to the movement of a total market index for the same period is known as:

B) beta. The measurement that compares a stock's price history to the movement of the total market index for the same period is beta. Standard deviation indicates how much an investment's returns have fluctuated from its average returns over a period of time, while R-squared measures whether an investment's returns tend to go up and down at the same time as the markets. Duration measures how sensitive a bond will be to small changes in interest rates.

A technical analyst would be least concerned with

B) book value per share. A technical analyst is not concerned with any fundamental aspects of a company, including company financials. Open short interest theory, overall market movements, and advance/decline ratios are of concern to technical analysts.

If a chart indicates that both the DJIA and the advance/decline line have been increasing since January, and the advance/decline line continues to rise, the market should:

B) continue to rise. A rising advance/decline line indicates that more stocks are rising in price than falling; a rising advance/decline line is a bullish indicator.

One of the valuation ratios used by fundamental analysts is the Price/Earnings ratio. The P/E ratio is the current market price of the stock divided by the:

B) earnings per share. An analyst will compute the P/E ratio by taking the current market price per share and dividing it by the earnings per share.

Debts that will come due more than 1 year after the date on the balance sheet are known as:

B) fixed (or long-term) liabilities. Debts that will come due more than 1 year after the date of the balance sheet are known as fixed (or long-term) liabilities. Current liabilities are debts that may come due within 1 year from the date on the balance sheet.

Due to changes in customer preferences, a manufacturing company has decided to discontinue the operations of one of its subsidiaries. An explanation of this decision would most likely be found in the company's:

B) footnotes to the financial statements. Footnotes are used to explain extraordinary items such as the sale of a subsidiary.

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward the client will have:

B) no effective change in the value of his ownership share. When a stock splits, the number of shares each shareholder holds increases. However, the value of each share decreases proportionately. The client experiences no effective change in the value of his ownership share.

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has:

B) no effective change in the value of the position. When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.

If stock market indexes, such as the S&P 500 and the DJIA, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is:

B) oversold. The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.

The following analyze corporate financial statements and trends in sales and income

C) Fundamentalists. Fundamental analysts obtain information from corporate financial statements as well as other relevant sources. Technical analysts review market charts while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements.

The following events is of the greatest importance to a technical analyst:

C) The stock's price recently penetrated its resistance level. Technical analysts focus on market price patterns. Typically, a technical analyst becomes bullish when a stock's price exceeds its resistance level (it penetrates its former ceiling price). Book values, credit ratings, and the resignation of a company's senior officer are of interest to fundamental analysts.

A company's working capital equals its:

C) current assets minus its current liabilities. Working capital is a measure of how well a company can meet its current obligations. It is the amount that is left free and clear if all current debts are paid off. Working capital is calculated by subtracting current liabilities from current assets.

On a balance sheet, dividends payable would fall under the category of:

C) current liabilities. Dividends payable are dividends that have been declared but have not yet paid out. They are a type of current liability; that is, an obligation that will come due within one year from the date on the balance sheet.

A technical analyst is least concerned with:

C) declaration of increased dividends. A technical analyst is interested in statistics about market or price performance, not the fundamental factors, the market, or the company's dividend policy. Technical analysts are interested in trading volume as a market statistic, new highs and lows, and open short positions, which could indicate future buying potential in the security.

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is the:

C) 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.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's:

C) support level. Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is:

C) the net change in the cash position of the firm for the reporting period. The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

The following is most commonly used to evaluate the marketplace's perceived value of a particular stock:

D) Price-to-earnings ratio. The price-to-earnings ratio compares the market price of a stock to the company's earnings per share. When investors are very positive regarding a stock's future, the PE ratio will generally be higher than those of other companies in the same industry.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor the:

D) advance/decline line. The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

An investment strategy that is designed to minimize risk and preserve the investor's principal is a(n):

D) defensive investment strategy. An investment strategy can be either defensive or aggressive. A defensive strategy is one that is intended to minimize risk, preserve capital, and provide a somewhat stable income. An aggressive investment strategy is designed to maximize returns and assume greater risks.

If a customer purchases a food company stock and a utility stock, the customer's portfolio is:

D) defensive. Food company stocks and utilities are defensive investments. Defensive investments are those that tend to hold up well in economic downturns.

An investment adviser reviewing a company's price to book value is using:

D) fundamental analysis. Fundamental analysis is using the company's financial statements to determine value. Financial statement analysis is not the proper term (even though that is what is being done). Technical analysis does not look at the company's books. Rather it focuses on charting methods such as point and figure.

The type of financial statement that shows a record of a company's operating activities and earnings over a stated period of time is a(n):

D) income statement. An income statement reflects a company's operating activities and earnings over a stated period of time. A balance sheet, on the other hand, provides a snapshot on a given date. A retained earnings statement shows how much of its earnings a company has retained for future growth, while a cash flow statement reflects where the company's cash flow came from and where it went.

If during a given year a company has net income of $1 million and pays out dividends of $800,000, its retained earnings will:

D) increase by $200,000. Retained earnings represent the net income a company has retained and not paid out in dividends. If a company has net income of $1 million and pays out only $800,000 in dividends, its retained earnings will increase by $200,000.

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is the:

D) 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.