Chapter 14- STC Study Set

A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? A. 8 times B. 6.5 times C. 7.5 times D. 8.6 times

A. 8 times The price-earnings ratio is the market price of the stock ($56) divided by the earnings per share ($7) which equals eight times

If the economy is experiencing rising inflation, this will generally lead to: A. A decrease in bond prices B. An increase in bond prices C. Volatility in bond prices D. No change in bond prices

A. A decrease in bond prices Rising inflation will usually lead to the FRB increasing short-term rates. This increase in rates will cause outstanding bond prices to decrease.

If an adviser wants to evaluate a publicly traded firm's ability to pay down its short-term debt, which ratio would be most appropriate? A. Debt Coverage Ratio B. Current Ratio C. P/E Ratio D. Sharpe Ratio

B. Current Ratio The best measure of short-term liquidity is the current ratio, which is calculated by dividing current assets by current liabilities. Although the debt coverage ratio also measures liquidity, it actually includes all debt-both short-term and long-term

Which of the following choices is a lagging economic indicator? A. Money supply B. Index of Industrial Production C. Average prime rate D. Stock prices

C. Average prime rate Average prime rate is considered a lagging indicator. Money supply and stock prices are leading indicators. The Index of Industrial Production is a coincidental indicator.

What's the current ratio of a company that has current assets of $10, fixed assets of $20, current liabilities of $5, long-term liabilities of $5, and shareholders' equity of $20? A. 0.5-to-1 B. 5-to-1 C. 0.25-to-1 D. 2-to-1

D. 2-to-1 To calculate current ratio, current assets are divided by current liabilities. In this question, the current ratio is 2-to-1 ($10 current assets/$5 current liabilities).

An investor might purchase a stock with a high P/E ratio because: A. The higher the P/E ratio, the greater the potential for higher dividends B. This indicates the company has sufficient income to pay expenses and possibly make dividend distributions C. This indicates a stable investment with little chance of volatility due to market fluctuations D. The investor expects higher future earnings

D. The investor expects higher future earnings The P/E ratio is used by the fundamental analyst to estimate the market's future earnings expectations for a company. A high P/E ratio indicates an investor is paying a high market price for today's earnings; the investor might do so with the expectation of higher future earnings. Stocks with high P/E ratios (typically growth companies) tend to pay a low, or no, dividend.

The balance sheet equation is: A. Assets - Liabilities = Net Worth B. Total Assets - Current Liabilities = Net Worth C. Total Assets - Total Liabilities = Capital Gains D. Current Assets - Current Liabilities = Net Worth

A. Assets - Liabilities = Net Worth The balance sheet equation is Assets - Liabilities = Net Worth. A client's net worth represents the value of the client's assets that have been financed with their own money (equity) and not borrowing (debt).

How is the book value of a company calculated? A. Total Assets - Total Liabilities B. Current Assets - Inventory C. Fixed Assets - Long-term Liabilities D. Current Assets - Current Liabilities

A. Total Assets - Total Liabilities Book value is calculated by taking all of a company's assets and subtracting all of its liabilities. Notice that book value can also be referred to as total shareholders' equity. The Price-to-Book Ratio is a common way to identify overvalued and undervalued companies.

The amount of money an issuer receives in a stock offering in excess of the par value is recorded on the balance sheet as: A. Capital surplus B. Earned surplus C. Retained earnings D. Capital gains

A. Capital surplus Shares are often priced well above par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, if a company prices an IPO at $18 per share and the par value is $10 per share, then $8 is added to the Capital Surplus in the stockholders' equity section of the balance sheet. A more common term for this excess is Additional Paid-in Capital or Capital in Excess of Par. Retained earnings can also be referred to as earned surplus.

New claims for unemployment insurance have been rising consistently for the past several months. This would indicate that the economy is in which area of the business cycle? A. Contraction B. Trough C. Peak D. Expansion

A. Contraction New claims for unemployment insurance are considered to be a leading economic indicator. If these were rising, it would indicate that the economy was beginning to weaken or contract.

If an analyst wanted to determine a company's ability to pay debts that would be maturing in one year, he would be most interested in the: A. Current ratio B. Debt-to-equity ratio C. Acid-test ratio D. Inventory turnover

A. Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test (quick) ratio excludes the inventories and is usually for a one- to three-month period.

What's the formula used to calculate the price to earnings ratio? A. Current stock price divided by the earnings per share last year B. Current stock price divided by the earnings per share two years ago C. Net income minus preferred dividends divided by the number of outstanding shares of common stock D. Current dividend divided by the current stock price

A. Current stock price divided by the earnings per share last year The price to earnings (PE) ratio is typically calculated by taking the current market price of the company's stock and dividing it by the earnings per share (EPS) from the last fiscal year. The current dividend by the stock price is the dividend yield, which is also called the current yield. Net income minus preferred dividends divided by the common shares outstanding is the formula for earnings per share (EPS).

If an analyst wants to measure the degree to which a company or partnership is leveraged, he would calculate the: A. Debt-to-total capital ratio, which is debt / total capital B. Current ratio, which is current assets / current liabilities C. Return on equity, which is net income / average stockholders' equity D. Quick asset test, which is (current assets - inventories) / current liabilities

A. Debt-to-total capital ratio, which is debt / total capital The debt-to-capital and debt-to-equity ratios both measure the amount of a company's capital that is financed with debt (i.e., its degree of leverage). The quick asset test and current ratio both measure a company's liquidity or short-term financial health.

A significant decline in the general level of prices is referred to as: A. Deflation B. Expansion C. Inflation D. Disinflation

A. Deflation A significant decline in the general level of prices is referred to as deflation. On the other hand, inflation is an increase in the level of prices, while disinflation is a slowing down of the increase in the level of prices. Expansion is the phase of the business cycle during which inflation is a characteristic.

All of the following statements concerning the differences between emerging and developed markets are TRUE, EXCEPT the statement that companies in: A. Emerging markets operate in a more regulated environment B. A developed market would have less long-term growth potential C. A developed market would have an easier time raising capital D. Emerging markets would have more risk

A. Emerging markets operate in a more regulated environment Emerging markets are markets that are just beginning to develop. They are typically characterized by primitive capital markets, underdeveloped industry, relatively low personal income levels and low profitability levels. There is strong long-term growth potential in such markets, but also above-average risk and significant stability factors. Companies in developed markets are more regulated, have an easier time raising capital, have less risk, and less long-term growth potential.

Which of the following items is NOT included in an income statement? A. Goodwill B. Interest expense C. Selling and administrative expenses D. Income taxes paid

A. Goodwill The income statement of a company includes its sales (revenues), less its operating expenses (e.g., selling and administrative expenses), less interest paid on its debt, which equals earnings before taxes. Taxes are then deducted to determine its net income, from which dividends may be declared. The income statement also includes non-recurring events such as the closing of a business or extraordinary items. The amount of goodwill is found on a company's balance sheet

In determining the gross profit margin, an analyst would subtract the: A. Gross profit from sales, divided by sales B. Gross profit from net sales, divided by gross sales C. Net profit from gross sales, divided by net sales D. Net profit from sales, divided by sales

A. Gross profit from sales, divided by sales The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The higher this ratio, the better from an investor's point of view, because a company that has a higher gross profit margin than its competitors is more efficient. Investors would normally be willing to pay more for a company that has a higher efficiency rating than its competitors.

An individual who primarily invests in securities that have a low dividend payout ratio, a high level of retained earnings, and a high price-to-earnings ratio would be described as a: A. Growth investor B. Conservative investor C. Value investor D. Contrarian

A. Growth investor Stocks with high retained earnings and low dividend payout ratios are considered growth- oriented investments. A value-oriented investor would seek investment in stocks that have low price-to-earnings ratios, or below what is perceived to be the stocks' intrinsic value. A conservative investor invests in low-risk investments that have stable cash flows. This would be consistent with stocks that have a high dividend payout ratio. A contrarian invests in stocks that are currently out of favor with investors

Which TWO the following conditions are generally TRUE when the yield curve inverts? Interest rates are relatively low Interest rates are relatively high Interest rates are expected to fall Interest rates are expected to rise A. II and III B. II and IV C. I and III D. I and IV

A. II and III The yield curve often inverts when interest rates are relatively high but are expected to fall in the near future. In such an environment, investors prefer to lock in relatively high long-term rates. The increased demand for long-term debt drives these prices up (and their yields down), as compared to short-term debt, causing the yield curve to invert.

The difference between the current ratio calculation and the quick asset ratio calculation is that the quick asset ratio excludes which of the following? A. Inventories B. All assets C. Current assets D. Money-market investments

A. Inventories The quick ratio formula is (current assets - inventories) / current liabilities

ABC Corporation has 10,000,000 shares outstanding and they're currently selling for $50 per share. ABC Corporation is an example of which type of company? A. Small capitalization B. Large capitalization C. Cyclical D. Defensive

A. Small capitalization The market capitalization of a company is determined by multiplying the its number of outstanding shares by the current market price of the shares. ABC Company's market capitalization is $500 million (10 million shares x $50 per share). Therefore, ABC is considered a small capitalization company since its market capitalization is between $300 million and $2 billion. There's nothing in the question to suggest that ABC is either a cyclical or a defensive company.

Detailing a company's net income is accomplished by: A. Subtracting expenses from revenues B. Figuring a company's cash flow C. Calculating a company's net profit margin D. Analyzing a company's net working capital

A. Subtracting expenses from revenues A fundamental analyst would examine a company's income statement in order to assess a corporation's performance during a specific period. The purpose of the income statement is to detail the company's net income (or loss). This is calculated by offsetting the revenues with expenses

Which of the following indexes or averages is made up of the largest number of stocks? A. The Wilshire Associates Equity Index B. The Dow Jones Composite Index C. The NYSE Composite Index D. The S&P 500 Index

A. The Wilshire Associates Equity Index The Wilshire Associates Equity Index shows the market value (in dollars) of approximately 3,500 NYSE and Nasdaq listed stocks. Of the choices given, it contains the most stocks.

What does a leverage ratio measure? A. The amount of additional debt that an issuer can assume B. The long-term prospects of a business C. The profitability of a corporation D. The amount of a company's earnings being paid out as a dividend

A. The amount of additional debt that an issuer can assume Leverage ratios (e.g., debt-to-equity ratio) measure the amount that a company has borrowed. Alternatively, liquidity ratios measure the amount of additional debt that a business can afford to issue.

Which of the following tools is NOT directly controlled by the FRB? A. The fed funds rate B. The discount rate C. Regulation T D. The reserve requirement

A. The fed funds rate The fed funds rate is the rate that's charged by one bank with excess reserves to another bank that needs an overnight loan in order to meet reserve requirements. Although the federal funds rates is greatly influenced by the FRB, it is the only choice that's not under the FRB's direct control.

If a corporation were to issue bonds with warrants attached, all the following characteristics would be a benefit to the corporation, EXCEPT: A. The issue would increase the debt to equity ratio of the company B. The marketability of the bonds would improve C. The bonds could be issued with a lower interest rate D. The issuance of warrants would not dilute shareholder ownership

A. The issue would increase the debt to equity ratio of the company The issuance of bonds would increase the debt to equity ratio of a corporation, which is not a benefit. Warrants attached to bonds are often described as a sweetener for the deal, allowing the bonds to be issued at a lower interest rate, while improving the marketability of the bonds. Warrants are not dilutive to shareholders when issued. However, when warrants are exercised, the action results in more outstanding shares and the dilution of the proportionate ownership of existing shareholders.

All of the following shares are included when calculating a company's market capitalization, EXCEPT: A. The number of shares that have been repurchased by the company B. The number of shares held by insiders C. The number of shares of restricted stock held by institutional investors D. The number of shares held by institutions

A. The number of shares that have been repurchased by the company Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, restricted shares, and shares held by insiders, but do not include treasury stock (shares repurchased by the company).

A company's PE ratio has historically been 30, but it has recently dropped to 15. In this case, what has most likely happened to the company? A. The price of the company's stock has fallen. B. The company has started paying common stock dividends. C. The price of the company's stock has risen. D. The earnings per share (EPS) has declined.

A. The price of the company's stock has fallen. The Price-to-Earnings (PE) ratio is the price of a company's stock divided by its Earnings Per Share (EPS) (i.e., PE Ratio = Stock Price ÷ EPS). If the company's PE ratio has fallen, this means that either the stock price has fallen or the EPS of the company has risen. Paying common shareholders a dividend doesn't impact EPS and will most likely cause the stock's price to rise.

At the beginning of the year, the price-to-earnings (P/E) ratio of ABC stock was 30, but three months later it fell to 15 because of bad news about the company's future earnings projections. Which of the following explains the company's lower PE ratio? A. The stock price decreased. B. The stock price increased. C. Earnings per share increased. D. Earnings per share decreased.

A. The stock price decreased. The price to earnings (PE) ratio is typically calculated by taking the current market price of the company's stock and dividing it by the earnings per share (EPS) from the last fiscal year. In this question, downgrading the future projections for the company's earnings will not have any impact on last year's EPS. However, the market price of the stock will fall due to the lower earnings projections, which explains how the P/E ratio fell from 30 to 15.

A fundamental analyst would NOT be interested in which TWO of the following? Short interest P/E ratio Trading volume EPS A. II and IV B. I and III C. II and III D. I and IV

B. I and III Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators

A high price-to-earnings ratio is usually consistent with: A. Companies with an above-average dividend payout B. Very large blue chip companies C. Very small companies D. Companies with very stable earnings

C. Very small companies High price-to-earnings ratios are often found in small, rapidly growing companies. Low margin businesses, such as supermarkets and discount retailers typically have low P/E ratios. Some capital intensive manufacturing businesses (e.g., autos) that have declining sales and profitability prospects would also be expected to have relatively low P/E ratios

A corporation has the following financial information. $1 million in cash $2 million in accounts receivable $5 million of inventory $10 million of equipment $3 million in short-term debt $50 million in long-term debt $2 million accounts payable What is the corporation's current ratio? A. 2.0 B. 1.6 C. 3.6 D. 2.6

B. 1.6 The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $8 million. Current liabilities include short-term debt and accounts payable, totaling $5 million. The current ratio is $8 million / $5 million, or 1.6.

A corporation has the following financial information: $3 million in cash $5 million in accounts receivable $8 million of inventory $7 million of equipment $2 million in short-term debt $40 million in long-term debt $4 million accounts payable What's the corporation's current ratio? A. 5:1 B. 8:3 C. 4:3 D. 1:2

B. 8:3 The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $16 million ($3 million cash + $5 million accounts receivable + $8 million inventory). Current liabilities include short-term debt and accounts payable, totaling $6 million ($2 million short-term debt + $4 million accounts payable). Therefore, the current ratio is 16:6 ($16 million ÷ $6 million). Since the ratio of 16:6 is not an appropriate ratio, it must be reduced. To reduce the ratio, the common denominator of 2 can be used. In other words, find the number of times 2 goes into 16 and the number of times it goes into 6. In this case 16:6 is reduced to 8:3. If reducing fractions is an uncomfortable exercise, the decimal method may be used. Since the current ratio can also be stated as 2.6 ($16 million ÷ $6 million), simply calculate the decimal version of the answer choices to determine which answer matches this number (e.g., 8 ÷ 3 = 2.6, which is the correct response, while 4 ÷ 3 = 1.33 and is incorrect).

A fundamental analyst, evaluating the common stock of a corporation, would examine all of the following, EXCEPT the: A. Sales of the corporation B. Current amount of short interest positions for the stock C. Management of the corporation D. Current amount of earnings paid as dividends to the shareholders

B. Current amount of short interest positions for the stock A fundamental analyst would examine all of the factors listed relating to a common stock except the current amount of short interest for the stock. Short interest is a statistic used by technical analysts. It represents the total amount of shares sold short that will have to be covered in the future

The manager of a value fund would look for securities with which of the following characteristics? A. High market-to-book ratios B. High dividend yields C. High betas D. High P/E ratios

B. High dividend yields Value investors are looking for stocks that are undervalued. They are the bargain hunters. Value stocks are characterized by low P/E (price/earnings) ratios, high dividend yields, and low market-to-book values (sometimes referred to as price-to-book ratios). Beta is a measure of a stock's volatility.

Which TWO of the following are TRUE if the U.S. balance of trade deficit is decreasing? The dollar will strengthen The dollar will weaken U.S. bond yields will rise U.S. bond yields will fall A. I and III B. I and IV C. II and III D. II and IV

B. I and IV When the U.S. is running a balance of trade deficit, it is importing more than it is exporting. This means that, on balance, U.S. dollars will be used to purchase foreign currencies to pay for the net imports. This strengthens foreign currency and weakens the dollar. However, if the balance of trade deficit begins to grow smaller, there is relatively less demand for the foreign currency and the dollar will strengthen. A stronger dollar indicates stronger demand for U.S. financial assets, including bonds. Bond prices will rise and their yields will fall.

If the dollar is increasing against foreign currencies, which TWO of the following results would most likely occur? An improvement in the U.S. balance of trade A worsening of the U.S. balance of trade An increase in imports into the U.S. Increased exports by the U.S. A. I and III B. II and III C. I and IV D. II and IV

B. II and III If the U.S. dollar is rising against foreign currencies, U.S. goods will be more expensive to foreigners. This should lead to decreased U.S. exports and increased imports into the U.S. These events would worsen the U.S. balance of trade.

Value investors would be interested in companies that have: A. High price to book value B. Low price earnings ratios C. Low dividend yields D. High price earnings ratios

B. Low price earnings ratios Value investing is a method of identifying securities that are undervalued based on company fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the book value than their competitors. Value investors believe that the most undervalued companies should rebound and outperform the market. This, of course, assumes that the company is financially sound

A yield curve that rises as maturities lengthen is a(n): A. Flat yield curve B. Normal yield curve C. Inverted yield curve D. Descending yield curve

B. Normal yield curve In a normal yield curve, long-term maturities have higher yields than intermediate-term maturities, which in turn are higher than short-term maturities. A normal yield curve is also called a positive or ascending yield curve.

During which phase of the business cycle will an investor experience a decrease in purchasing power? A. Expansion B. Peak C. Trough D. Contraction

B. Peak The peak is the high point of the business cycle, during which the demand for goods starts to overtake supply. During this phase, prices and inflation are increasing, which results in the decline of the consumer's purchasing power.

During a given period of time, the Consumer Price Index has decreased by 10% while the yield on your investment has decreased by 7% of its original rate. How has this affected the purchasing power of your investment? A. Purchasing power has decreased B. Purchasing power has increased C. Purchasing power is affected only if the dollar also weakens against other major currencies D. Purchasing power has remained relatively stable

B. Purchasing power has increased If the Consumer Price Index (CPI) decreased by a greater rate than the yield on your investment, the purchasing power of the invested dollars would have increased.

A technical analyst will consider which of the following? A. P/E ratio B. Supply and demand figures C. Beta D. Risks

B. Supply and demand figures P/E ratios and market risks are typically associated with fundamental analysis, rather than technical analysis. Technical analysts can use supply and demand figures to determine when they should buy and sell stocks. Beta is measure of a stock's systematic risk and is not used by technical analysts to make trading decisions.

If you were examining a balance sheet, you would expect to see: A. Capital expenditures B. The number of common shares outstanding C. Income before interest and taxes D. Taxes paid

B. The number of common shares outstanding The balance sheet contains three main categories: assets, liabilities, and net worth (stockholders' equity). Within the net worth section, you will find the number of common shares outstanding. Income before interest and taxes and taxes paid are found in the firm's income statement. Capital expenditures are part of the statement of cash flows.

Which of the following statements is TRUE if interest rates are lower in the U.S. than they are overseas? A. U.S. investors will invest in the United States. B. U.S. investors will invest overseas. C. Foreign goods will become more attractive. D. The value of the dollar will strengthen.

B. U.S. investors will invest overseas. If interest rates are lower in the U.S. than they are overseas, this will typically lead to U.S. investors investing overseas. This will decrease the demand for the dollar, which results in a weaker dollar and foreign goods being less attractive.

A U.S. portfolio manager that anticipates receiving an interest payment in a foreign currency would be concerned that the currency might: A. Strengthen against the dollar B. Weaken against the dollar C. Go off the gold standard D. Remain the same against the dollar

B. Weaken against the dollar If the foreign currency weakens against the dollar, then the interest payment will be worth less in U.S. dollars than expected. If the foreign currency strengthens, the payment will be worth more in U.S. dollars. Last, if the currency remains the same against the dollar, the interest payment will be worth exactly the same in U.S. dollars

When comparing value stocks to growth stocks, one difference is that value stocks have which of the following characteristics? A. A low equity-to-debt ratio B. A low dividend payout ratio C. A low price-to-book value D. A higher P/E ratio than growth stocks

C. A low price-to-book value Value stocks are those that are considered undervalued in relation to their book value. Compared to growth stocks, value stocks often have a low P/E ratio and a higher dividend yield.

If a client is interested in purchasing a stock that has a low P/E ratio, a high dividend payout ratio, and wants the issuer to have a large amount of cash reserves, what type of stock should an IAR recommend? A. A small-cap stock B. A growth stock C. A value stock D. A large-cap stock

C. A value stock Two of the characteristics of value stocks are low P/E (price/earnings) ratios and high dividend payout out ratios (or high dividend yields). A company's dividend payout ratio is the percentage of its earnings that are paid to investors. Value stocks are also characterized by low price-to-book ratios, which is consistent with a company that has a significant amount of cash on hand. In contrast, growth stocks (choice a) generally have high P/E ratios and low dividend payout ratios. These companies tend to keep most of their earnings in order fund their continued expansion. Large-cap stocks (choice c) are issued by companies that have market capitalizations of greater than $10 billion. Many value stocks may also be large-cap stocks since they tend to be mature companies with a history of regular dividend payments; however, they are NOT necessarily characterized by low P/E ratios

A fundamental analyst could use a corporation's balance sheet to determine all of the following measurements, EXCEPT: A. Working capital B. Current ratio C. Cash flow D. Debt-to-equity ratio

C. Cash flow A balance sheet is comprised of three sections: assets, liabilities and stockholder equity. The basic computation for cash flow is net income (found on the income statement, not the balance sheet) plus depreciation, which is also found on the company's income statement

The economic cycle consists of four stages--full recession, early recovery, late recovery, and early recession. Since the market tends to move ahead of the economic cycle, an adviser who believes the economy is in a full recession may advise clients to rotate into what sector? A. Fixed income securities B. Staples and defensive stocks C. Cyclicals, such as transports and technology D. Services and utilities

C. Cyclicals, such as transports and technology In anticipation of changes in the economic cycle, an adviser may advocate sector rotation, in which a client's portfolio holdings are rotated from one or more business sectors into others. If the economy is in full recession, one strategy is to rotate into cyclical stocks that would benefit from a recovering economy, such as industrials, e.g., manufacturers of autos, appliances, or houses, which would experience increased sales in a recovery

Which of the following items is NOT included in an income statement? A. Operating expenses B. Revenue C. Dividends payable D. Interest expense

C. Dividends payable The income statement of a company includes its sales (revenues), less its operating expenses, less interest paid on its debt, which equals earnings before taxes. Taxes are then deducted to determine its net income, from which dividends may be declared. The income statement also includes non-recurring events such as the closing of a business or extraordinary items. The entry of dividends payable is found on a company's balance sheet.

All of the following would indicate inflationary pressure on the economy, EXCEPT: A. Falling weekly jobless claims B. Rising retail sales figures C. Falling industrial production D. A rising consumer price index

C. Falling industrial production A rising CPI is the definition of inflation. If retail sales figures are going up or jobless claims are falling, consumer demand should rise. These two situations are therefore inflationary. If industrial production is declining, the assumption is that the economy is slowing down.

Interest rates had been very high. During the past three years, rates have decreased dramatically. The present yield curve would MOST likely be: Ascending Positive Inverted Negative A. III and IV B. II and III C. I and II D. I and III

C. I and II If rates have declined for the past three years, the present yield curve would most likely be a normal yield curve, which is also referred to as a positive, ascending, or upward-sloping yield curve.

ABC Corporation has issued $100 million worth of bonds at $1,000 par value. The effect of the issuance of the bonds would be an increase in: Working capital Total liabilities Total assets Stockholders' equity A. II only B. I only C. I, II, and III only DI, II, III, and IV

C. I, II, and III only Working capital equals current assets minus current liabilities. The cash received from the sale increases current assets. The bonds are a long-term liability, not a current liability. Therefore, working capital would increase. The increase in current assets would increase total assets as well. Long-term liabilities and total liabilities would also be increased by the additional debt. However, there would be no change in stockholders' equity (total assets minus total liabilities), since the money received would be exactly offset by the amount of additional debt

Which of the following items might be found in a footnote to a balance sheet? The P/E ratio Methods of depreciation Methods of inventory valuation The market price of securities A. I, III, and IV only B. I and IV only C. II, III, and IV only D. I and III only

C. II, III, and IV only Footnotes to the balance sheet might disclose methods of depreciation and inventory valuation, the market price of securities, and other data necessary to make information on the balance sheet more complete. The P/E ratio would generally not appear in a corporation's financial statements.

In calculating a company's market capitalization, the treasury stock of a corporation is: A. Added to market value at purchase cost B. Subtracted from the market value of outstanding shares at cost C. Ignored D. Subtracted from market value at market value

C. Ignored In order to calculate the market capitalization of a company, multiply the number of outstanding shares of common stock by the current market price. The number of outstanding shares does not include treasury shares, so the latter may be ignored. A company's outstanding shares are found by subtracting the number of treasury shares from the number of shares the company has issued.

An investor wishing to calculate the basic earnings that a corporation capitalized with common and preferred stock and convertible bonds would divide the: A. Net income after converting the convertible bonds and subtracting the preferred dividends by the number of common shares outstanding B. Net income by the number of shares of common shares outstanding C. Net income minus any preferred dividends paid by the number of common shares outstanding D. Earnings before interest and taxes by the number of common shares outstanding

C. Net income minus any preferred dividends paid by the number of common shares outstanding This question is asking for the formula used to calculate earnings per share (EPS). In its simplest form, this formula is net income minus preferred dividends, if any, divided by the number of common shares outstanding. Using net income after conversion would be correct if the question asked for EPS on a fully diluted basis

Value investing is: A. Risky because it's always bearish B. Safe because value companies are profitable C. Risky because it's contrarian D. Safe because value companies are unlikely to go bankrupt

C. Risky because it's contrarian When using a value investing approach, and investor's goal is to find and invest in companies that are intrinsically undervalued. Value investors tend to focus on company stocks that have low share prices, high dividends, low P/E ratios, and low price-to-book ratios. Value investors try to find stocks that are trading at prices lower than their intrinsic value (i.e., the market undervalues them). Put another way, value investors are betting against the market as a contrarian strategy.

Currency values in a floating-rate system are established by: A. Government regulations B. The International Monetary Market C. Supply and demand for the currency D. The World Bank

C. Supply and demand for the currency Under a floating-rate system, currency values are established by supply and demand for the currency. Supply and demand for currencies may be influenced by the country's rate of inflation, level of interest rates, gold reserves, and trade deficit. The opposite of a floating-rate system is a fixed-rate system, whereby countries agree to a currency exchange rate that will not fluctuate.

If an adviser is using a sector rotation strategy, which of the following asset classes would they rotate into when the economy appears to be ready for recovery? A. Consumer staples B. Utilities C. Technology D. Healthcare

C. Technology During recovery, the sectors that perform the best are technology, industrial, and cyclicals. During a recession, the sectors that perform the best are consumer staples, utilities, service, and financial industries

What does a debt-to-equity ratio of 1-to-1 signify? A. The company's debt is larger than its equity B. The company's equity is larger than its debt C. The company is highly leveraged D. The company has not utilized any leverage

C. The company is highly leveraged The debt-to-equity ratio measures the leverage of a company. A normal debt-to-equity ratio can vary depending on the industry; however, a ratio of 1-to-1 or more typically signifies that the company is highly leveraged. Since the debt-to-equity ratio is 1-to-1 in the question, the debt and equity are the exact same amount.

A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE? A. Stockholders' equity increases B. Working capital increases C. The current ratio increases D. Bond interest coverage probably increases

C. The current ratio increases When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital and stockholders' equity would stay the same. Bond interest coverage compares earnings before interest and taxes to the bond interest expense, and would not be affected in this case

Which of the following is a leverage ratio? A. Assets - Liabilities B. Current Assets/Current Liabilities C. Total Debt/Total Equity D. Current Assets - Current Liabilities

C. Total Debt/Total Equity Leverage is a measure of the amount that a firm has borrowed. One of the more common ratios used to measure a company's leverage is the Debt-to-Equity Ratio, which is calculated by taking total debt (i.e., liabilities) and dividing by total equity.

If a company's total assets remain the same but stockholders' equity decreases, which of the following statements is TRUE? A. Accrued expenses decrease B. Retained earnings increase C. Total liabilities increase D. Capital in excess of par increases

C. Total liabilities increase When total assets remains the same and stockholders' equity declines, then total liabilities must increase. The correct formula for a balance sheet is: Total Assets = Total Liabilities + Stockholders' Equity

Which of the following item(s) are listed on the income statement? Assets Liabilities Retained Earnings Operating Expenses A. I, II, III, and IV B. III and IV only C. III only D. IV only

D. IV only Assets, liabilities and retained earnings are balance sheet items and are not represented on the income statement. Retained earnings are the funds that a company earned that it did not pay out in the form of cash dividends.

Which of the following yields results in the highest real inflation-adjusted rate of return? A. A bond yields 12% when inflation is at 8% B. A bond yields 10% when inflation is at 7% C. A bond yields 6% when inflation is at 4% D. A bond yields 8% when inflation is at 3%

D. A bond yields 8% when inflation is at 3% The inflation-adjusted rate of return, also referred to as the real interest rate, is calculated as follows: yield minus inflation rate. The highest inflation-adjusted return is available on the bond that yields 8% when inflation is at 3%, since it's adjusted return is 5% (8% bond yield - 3% inflation rate)

A corporation's balance sheet lists intangible assets of $40 million, equipment of $5 million, and real estate of $30 million. The company also has cash of $20 million, inventory of $5 million, and receivables of $5 million. The corporation's equity is $65 million and it has $15 million of long-term debt. The total short-term liabilities are $25 million which consists of accounts and interest payable. Based on this information, what can be assumed about the company's long-term liquidity? A. Since the corporation's current liabilities are larger than its current assets, it's illiquid. B. Based on the company's working capital and current ratio, it has sufficient long-term liquidity. C. Since the company's quick ratio exceeds 1.0, it has long-term liquidity. D. Based on the company's debt-to-capital and debt-to-equity ratios, it has sufficient long-term liquidity.

D. Based on the company's debt-to-capital and debt-to-equity ratios, it has sufficient long-term liquidity. Long-term liquidity can be measured by the debt-to-capital and debt-to-equity ratios. The debt-to-capital ratio is calculated by dividing a company's debt by its total capital, which consists of debt and equity [i.e., Debt-to-Capital = Debt ÷ (Debt + Equity)]. The debt-to-equity ratio is simply debt divided by equity (i.e., Debt to Equity = Debt ÷ Equity). The lower these two ratios are, the more long-term liquidity a corporation possesses. In most cases, companies will have more debt than equity. In this question, since the company has more equity than debt, it's incredibly liquid. Notice that liquidity ratios are calculated with numbers from the balance sheet; therefore, the income statement is not needed.

If the average current ratio for a sector is 2.0, which of the following companies has the best short-term outlook? A. Company D with a current ratio of 0.7 B. Company C with a current ratio of 1.3 C. Company B with a current ratio of 1.7 D. Company A with a current ratio of 3.5

D. Company A with a current ratio of 3.5 The current ratio measures the liquidity or short-term financial health of a company. The formula for calculating the current ratio is Current Assets ÷ Current Liabilities. Typically, a higher current ratio is a signal of a stronger business, especially in the short-term. Since company A has the highest current ratio and is higher than the sector average, it has the best short-term outlook

If the U.S. economy was experiencing tough times with slow or negative growth, creating an extreme lack of demand for consumer goods, the result might be: A. Inflation B. Stagflation C. Disintermediation D. Deflation

D. Deflation Deflation occurs when the prices of goods and services fall. This is a rare occurrence. It would be caused by slow or negative growth, which would lead to extremely small demand for consumer goods in relation to the supply of those goods. Stagflation also involves slow growth but when stagflation exists, prices are rising quickly (inflation), not falling.

Which of the following items is found on a balance sheet? A. Expenses of the company B. Interest payments C. Sales D. Equipment

D. Equipment Equipment is specifically found in the Fixed Assets section of the balance sheet. Each of the other choices are included on a company's income statement

A stock that is traded on the NYSE has a high P/E ratio, a low dividend payout ratio, and a high level of retained earnings? What type of stock is it? A. Mid-cap B. Small-cap C. Value D. Growth

D. Growth Growth stocks are characterized by high P/E ratios, low dividend payout ratios and high levels of retained earnings. Therefore, the stock described in the question is most likely a growth stock. Value stocks, are characterized by low P/E ratios, high dividend payout ratios, and low price-to-book ratios. Many growth stocks are also small cap-stocks which are issued by companies with market capitalizations between $300 million and $2 billion or micro-cap stocks which are issued by companies with market capitalizations of less than $300 million. However, the characteristics of the stock being described fit the definition of a growth stock much more exactly.

All of the following would normally be characteristics of a growth company, EXCEPT: A. Wide trading range for the price of its stock B. High amount of research and development costs C. High price-earnings ratio D. High dividend payout ratio

D. High dividend payout ratio Growth companies will normally retain most of their earnings to enable the company to continue its growth. They would typically have low dividend payout ratios, high research and development expenses, and high price-earnings ratios, as well as more volatile stock prices.

Growth stocks would typically have which TWO of the following characteristics? High price/earnings ratios High dividend-payout ratios Low price/earnings ratios Low dividend-payout ratios A. I and II B. III and IV C. II and III D. I and IV

D. I and IV The term growth stock applies to a company that has shown a consistent high rate of growth for earnings over a period of time. Historically, investors have been willing to pay more for one dollar of earnings for these stocks compared to other securities and they usually sell at higher price-earnings ratios. Since the company is in a growth stage, a large percentage of the profits will be retained by the company, resulting in a low dividend-payout ratio. Therefore, growth stocks typically have high price-earnings ratios and low dividend-payout ratios

Which of the following choices is NOT considered to be a leading economic indicator? A. Plant and equipment orders B. Index of consumer expectations C. Building permits D. Industrial production

D. Industrial production Industrial production is a coincident business cycle indicator; the other choices are leading indicators. The following is a list of leading economic indicators. Average workweek (manufacturing) Initial unemployment claims New orders for consumer goods and equipment Vendor performance Plant and equipment orders Building permits Interest rate spreads, 10-year Treasury bonds less federal funds Stock prices (S&P 500) The Money Supply (M2) Index of consumer expectations

A company's current assets equal $10 million, which consists of cash of $3 million, inventories of $2 million, and accounts receivable of $5 million. The company also has $15 million of current liabilities, which includes $7 million of accounts payable and $8 million of interest payable. Based on the company's balance sheet information, the company's liquidity is: A. Complaint with SEC requirements for exchange-listed companies B. Sufficient to meet its short-term obligations C. Unknown based on the information provided D. Insufficient to meet its short-term obligations

D. Insufficient to meet its short-term obligations A company's short-term liquidity is measured by comparing its current assets to its current liabilities. Working capital is one measure and can be found by subtracting current liabilities from current assets (i.e., Working Capital = CA - CL). This company's working capital is -$5 million (i.e., it's negative). Another liquidity measure is a company's current ratio. Current ratio is calculated by taking current assets and dividing by current liabilities (i.e., Current Ratio = CA ÷ CL). This company's current ratio is 0.667. It's important to recognize that companies with negative working capitals and/or current ratios of less than 1.0 are illiquid and will have trouble continuing operations (i.e., they may go bankrupt).

When calculating the current ratio of a corporation, all of the following are included, EXCEPT: A. Accounts payable B. Inventory C. Accounts receivable D. Net income

D. Net income The formula for calculating the current ratio is current assets of a firm divided by its current liabilities. Both accounts receivable and inventory are current assets and are therefore included. Accounts payable is a current liability on a company's balance sheet and is also included. However, net income is not actually included on a firm's balance sheet; instead, it appears on the income statement. As a result, net income is not needed when calculating the current ratio.

During periods of deflation, the FRB will likely: A. Encourage a rise in interest rates B. Sell securities in the open market C. Issue new securities D. Purchase securities in the open market

D. Purchase securities in the open market In an effort to stimulate the economy, the FRB will attempt to move into a period of easy money. Easing money (making it available) may be accomplished by purchasing securities in the open market. On the other hand, selling securities, issuing new securities, or encouraging higher interest rates will have an opposite effect.

Which of the following would be used to determine the debt-to-equity ratio? A. The statement of retained earnings B. The income statement C. The cash flow statement D. The balance sheet

D. The balance sheet The debt-to-equity ratio is the amount of debt issued by a company in comparison to the amount of shareholders equity. The higher the ratio, the more leveraged a company is. The ratio is calculated by taking total debt capital and dividing by equity capital, which are both found on the balance sheet.

All of the following are true regarding the balance of payments, EXCEPT: A. The sum of the capital account and the current account must be zero B. The purchase of a Treasury bond by a foreign investor would represent a positive entry in the capital account C. A persistent current account deficit will drain foreign currency reserves D. The capital account shows the results for trade transactions completed in the current year

D. The capital account shows the results for trade transactions completed in the current year The current account shows the results for the trade transactions completed in the current year. The capital account shows the inflows and outflows of capital in transactions involving property and financial assets. The net of the two accounts must be zero

ABC Corporation has a book value per share of $10 and a market value per share of $25. The corporation's net income is $25 million, it has 10 million shares of common stock outstanding, and has no preferred stock in its capital structure. Which of the following statements is TRUE? A. The company's price-to-book value is five. B. The company's stock is trading at a discount to it's book value. C. The company's price-to-earning ratio is four. D. The company's price-to-earning ratio is 10.

D. The company's price-to-earning ratio is 10. ABC's price-to-earnings (P/E) ratio is 10-to-1. To calculate the PE ratio, a company's share price is divided by it's earnings per share (EPS). The formula for calculating the EPS is (Net Income - Preferred Dividends) ÷ Common Shares Outstanding. In this example, ($25 million net income - $0 Preferred Dividends] ÷ 10 million shares outstanding) = EPS of $2.50. Therefore, ABC's share price of $25 is 10 times its EPS of $2.50. Since ABC's market price of $25 is greater than its book value of $10, the stock is trading at a premium to its book value. Specifically, the price-to-book ratio is 2.5 ($25 market price ÷ $10 book value), or to put it another way, the stock is trading at 2.5 times its book value.

Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be: A. Falling interest rates in the U.S. B. Rising interest rates in the U.S. C. The dollar rising in value relative to the currencies of our trading partners D. The dollar declining relative to our trading partners' currencies

D. The dollar declining relative to our trading partners' currencies Normally, if a country's currency is declining in value relative to the currencies of its trading partners, imports would fall and exports would rise. When a country's currency is in decline, its goods would fall in price relative to similar products imported from abroad. Falling interest rates in the U.S. may not always have an effect on lowering the value of the dollar

All of the following statements are true regarding yield curves, EXCEPT: A. In a flat yield curve, both short-term and long-term rates are equal B. In a descending curve, short-term rates are greater than long-term rates C. In an ascending curve, short-term rates are lower than long-term rates D. They are fixed and may only be changed by commercial banks

D. They are fixed and may only be changed by commercial banks Yield curves are ascending (upward sloping from the shorter to longer maturities) when money is easy. When this occurs, short-term rates are lower than long-term rates. A descending yield curve, which is indicative of a tight money situation, will show short-term rates higher than long-term rates. A flat yield will indicate that short-term and long-term rates are approximately the same.

If the Wilshire 5000-to-GDP ratio is high, what would a technical analyst suggest that it means about U.S. equities? A. They're undervalued compared to foreign equities B. They're under-valued C. They're fairly valued D. They're overvalued

D. They're overvalued The Wilshire 5000 is a stock index that's made up of all U.S. stocks. The Wilshire 5000-to-GDP ratio measures how over- or under-valued U.S. stocks are relative to the U.S. economy. A ratio above 1.0 indicates that U.S. stocks are over-valued, while a ratio below 1.0 indicates U.S. stocks are under-valued.

A client calls an investment adviser representative to discuss a stock she is interested in purchasing. The stock has a low P/E ratio, a high dividend payout ratio and its issuer has a large amount of cash reserves. What type of stock is it? A. Large-cap B. Small-cap C. Growth D. Value

D. Value Two of the characteristics of value stocks are a low P/E (price/earnings) ratio and a high dividend payout ratio (or high dividend yield). A company's dividend payout ratio is the percentage of its earnings that are paid to investors as a dividend. Value stocks are also characterized by low price-to-book ratios, which is consistent with a company that has a lot of cash on hand. In contrast, growth stocks, generally have a high P/E ratio and a low dividend payout ratio. These companies tend to keep most of their earnings in order to fund their continued expansion. Large-cap stocks are issued by companies that have market capitalizations of more than $10 billion. Many value stocks may also be large-cap stocks since they tend to be issued by mature companies with a history of regular dividend payments but they are NOT characterized by low P/E ratios

An analyst who wanted to determine a company's ability to pay those debts that would be maturing in one year would be most interested in which of the following? A. The P/E ratio B. Inventory turnover C. The debt-to-equity ratio D. Working capital

D. Working capital Measures of liquidity, such as working capital, assess a company's ability to deal with its short-term obligations (one year or less)

The difference between a corporation's current assets and its current liabilities is called: A. Liquid assets B. Current ratio C. Cash flow D. Working capital

D. Working capital The formula for working capital is current assets minus current liabilities. Therefore, the difference between a corporation's current assets and its current liabilities is its working capital. Both current assets and current liabilities are found on the balance sheet. Current ratio is found by dividing current assets by current liabilitites.