Equity Investments (2)
A change in which of the following best describes a macroeconomic influence on industry growth? The cost of debt Personal spending habits Population size
A
A company that is required to raise equity capital to continue to operate as a going concern is most likely doing so to: improve capital adequacy ratios. fund capital expansion projects. purchase long-lived assets.
A
An industry with high barriers to entry and weak pricing power most likely has: high barriers to exit. stable market shares. significant numbers of issued patents.
A
Assume the current dividend of a security is $9.50. The dividend is expected to grow by 12% each year for two years and then 3% afterwards. The required rate of return is 15%. The security's value is closest to: $95.58. $120.51. $94.99.
A
The primary difference between P/E multiples based on comparables and P/E multiples based on fundamentals is that fundamentals-based P/Es take into account: future expectations. the law of one price. historical information.
A
The voting rights of an unsponsored depository receipt (DR) belong to the: depository bank. direct owners of the foreign common shares. foreign company whose shares are held by the depository
A
Which of the following is the least appropriate method for an external analyst to use to estimate a company's target capital structure for determining the weighted average cost of capital (WACC)? Using the company's current capital structure at book value weights Using averages of comparable companies' capital structure Using statements made by the company's management regarding capital structure policy
A
Which of the following multiples is most useful when comparing companies with significant differences in capital structure? EV/EBITDA Price-to-book ratio Price-to-cash flow ratio
A
Which of the following statements is most accurate in describing a company's book value? Book value increases when a company retains its net income. Book value is usually equal to the company's market value. The ultimate goal of management is to maximize book value.
A
With respect to competitive strategy, a company with a successful cost leadership strategy is most likely characterized by: a low cost of capital. reduced market share. the ability to offer products at higher prices than competitors
A
Which of the following is most likely classified as a defensive industry? A mature industry with government-controlled pricing A non-cyclical, high-growth industry A cyclical industry with a few competitors
A is correct. A defensive industry is non-cyclical with stable earnings. A mature industry with government-controlled pricing will have stable earnings and be non-cyclical.
An industry characterized by rising volumes, improving profitability, falling prices, and relatively low competition among companies is most likely in which of the following life-cycle stages? Growth Mature Embryonic
A is correct. An industry in growth stage is characterized by rising volumes, improving profitability, falling prices, and relatively low competition among companies.
Which of the following statements concerning companies in different industry environments is most accurate? Companies in mature industries tend to focus on efficiency gains and gain market share through superior products. An industry's experience curve declines with a decrease in the utilization of capital equipment and spreading overhead over a fewer number of units. Companies in fragmented industries would not be highly price competitive because they tend to think individualistically, making coordination difficult.
A is correct. Companies in mature industries are likely to pursue replacement demand rather than new buyers and are probably focused on extending successful product lines rather than introducing revolutionary new products. Therefore, they tend to focus on cost rationalization and efficiency gains rather than on taking a lot of market share. Furthermore, companies with superior products or services are likely to gain market share.
According to the industry life-cycle model, companies in a mature industry are most likely to experience: high barriers to entry. fierce competition. low dividend yields.
A is correct. In the mature stage of the industry life-cycle model, brand loyalty and efficient cost structures will create barriers to entry. Fierce competition is a characteristic of the shakeout phase: Demand approaches market saturation levels because few new customers are left to enter the market. Because few growth opportunities are available in the mature phase, there is little need for capital investment, and thus greater amounts of earnings are paid out as dividends, increasing dividend yields.
Which of the following statements about peer groups is most accurate? A peer group is constructed through a process: that starts with an existing commercially classified system that is then narrowed. that locates a group of companies whose valuation is influenced by diverse factors. where management should refrain from participating to maintain objectivity in the process.
A is correct. The process consists of initially examining commercial classification systems and then refining it to the companies operating in the chosen industry.
Industry analysis is least useful to those who are engaged in: a top-down investment approach. indexing and passive investing strategies. portfolio performance attribution.
B
The Gordon growth model can be used to value dividend-paying companies that are: expected to grow very fast. in a mature phase of growth. very sensitive to the business cycle.
B
When constructing a list of peer companies to be used in equity valuation, which of the following would least likely improve the group? Companies in the same peer group should ideally: be exposed to similar stages in the business cycle. have similar valuations. have the effects of finance subsidiaries minimized.
B
Which of the following measures is the most difficult to estimate? The cost of debt. The cost of equity. Investors' required rate of return on debt.
B
A company's series B, 8% preferred stock has the following features: A par value of $50, and it pays quarterly dividends. Its current market value is $35. The shares are retractable (at par) with the retraction date set for three years from today. Similarly rated preferred issues have an estimated nominal required rate of return of 12%. Analysts expect a sustainable growth rate of 4% for the company's earnings. The intrinsic value estimate of a share of this preferred issue is closest to: $33.33. $45.02. $52.00.
B is correct. Because the current market value is well below the retraction price, retraction is likely, and the preferred share will be priced on the basis of its retraction feature.
Participating preference shares are least likely to entitle the shareholders to participate in: additional distribution of the company's assets upon liquidation. corporate decisions through voting rights. additional dividends if the company's profits exceed a predetermined level.
B is correct. Participating preference shares do not entitle the shareholders to participate in corporate decisions through voting rights. But they do entitle them to (1) an additional dividend if the company's profits exceed a prespecified level and (2) additional distribution of the company's assets upon liquidation, above the par.
Which of the following statements concerning the use of industry analysis is most accurate? Industry analysis is most useful for: sector allocations in passive equity portfolios. portfolio performance attribution. evaluating market efficiency.
B is correct. Portfolio performance attribution, which addresses the sources of a portfolio's returns, usually in relation to the portfolio's benchmark, includes industry or sector selection. Industry classification schemes play a role in such performance attribution.
The type of equity voting right that grants one vote for each share of equity owned is referred to as: proxy voting. statutory voting. cumulative voting.
B is correct. Statutory voting is the type of equity voting right that grants one vote per share owned.
According to the industry life-cycle model, an industry in the shakeout stage is best characterized as experiencing: little or no growth and industry consolidation. slowing growth and intense competition. relatively high barriers to entry and periodic price wars.
B is correct. The shakeout stage is usually characterized by slowing growth, intense competition, and declining profitability. During the shakeout stage, demand approaches market saturation levels because few new customers are left to enter the market. Competition is intense as growth becomes increasingly dependent on market share gains.
A price earnings ratio that is derived from the Gordon growth model is inversely related to the: growth rate. dividend payout ratio. required rate of return.
C
Assuming a 4% required rate of return, what is the intrinsic value per share of an outstanding issue of 5% perpetual preferred stock with a par value of £100 and no embedded options? £80 £100 £125
C
Emerging markets have benefited from recent trends in international markets. Which of the following has not been a benefit of these trends? Emerging market companies do not have to worry about a lack of liquidity in their home equity markets. Emerging market companies have found it easier to raise capital in the markets of developed countries. Emerging market companies have benefited from the stability of foreign exchange markets.
C
In asset-based valuation models, the intrinsic value of a common share of stock is based on the: estimated market value of the company's assets. estimated market value of the company's assets plus liabilities. estimated market value of the company's assets minus liabilities.
C
In which of the following life-cycle phases are price wars most likely to be absent? Mature. Decline. Growth.
C
Venture capital investments: can be publicly traded. do not require a long-term commitment of funds. provide mezzanine financing to early-stage companies.
C
Which factor is most likely associated with stable market share? Low switching costs. Low barriers to entry. Slow pace of product innovation.
C
Which of the following is least likely a primary reason a company would raise capital through the issuance of equity securities? To: finance the purchase of long-lived assets maximize the wealth of shareholders directly satisfy stock compensation plans
C
Which of the following is most likely a characteristic of a concentrated industry? Infrequent, tacit coordination. Difficulty in monitoring other industry members. Industry members attempting to avoid competition on price.
C
Which of the following life-cycle phases is typically characterized by high prices? Mature. Growth. Embryonic.
C
Which of the following statements is least accurate? A firm's free cash flow to equity (FCFE): is a measure of the firm's dividend-paying capacity. increases with an increase in the firm's net borrowing. is significantly affected by the amount of dividends paid by the firm.
C
An asset-based valuation model is most applicable for a company with significant: intangible assets. property, plant, and equipment. proportions of current assets and current liabilities and few intangible assets.
C is correct. Asset-based valuations work well for companies that do not have a high proportion of intangible or "off the books" assets and that do have a high proportion of current assets and current liabilities.
Participating preference shares entitle shareholders to: participate in the decision-making process of the company. convert their shares into a specified number of common shares. receive an additional dividend if the company's profits exceed a pre-determined level.
C is correct. Participating preference shares entitle shareholders to receive an additional dividend if the company's profits exceed a pre-determined level.
