Series 65 Chapter 14
A fundamental analyst would NOT be interested in which TWO of the following? 1. Short interest 2. P/E ratio 3. Trading volume 4. EPS
# 1 and 3
Interest rates had been very high. During the past three years, rates have decreased dramatically. The present yield curve would MOST likely be: 1. Ascending 2. Positive 3. Inverted 4. Negative
# 1 and 2
What is Regulation T?
An extension of credit by B/D
If the dollar is declining against foreign currencies, which TWO of the following results would most likely occur? 1. An improvement in the U.S. balance of trade 2. A worsening of the U.S. balance of trade 3. An increase in imports into the U.S. 4. Increased exports by the U.S.
# 1 and 4
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: 1. Working capital 2. Total liabilities 3. Total assets 4. Stockholders' equity
# 1, 2, and 3
If the dollar is increasing against foreign currencies, which TWO of the following results would most likely occur? 1. An improvement in the U.S. balance of trade 2. A worsening of the U.S. balance of trade 3. An increase in imports into the U.S. 4. Increased exports by the U.S.
# 2 and 3
Which TWO of the following are TRUE regarding the causes of inflation? 1. Demand-pull inflation occurs when the demand for money increases and pulls interest rates higher, causing inflation 2. Demand-pull inflation occurs when the demand for goods and services increases faster than supply, causing inflation 3. Cost-push inflation occurs when the increase in prices of raw materials leads to increasing retail prices, causing inflation 4. Cost-push inflation occurs when the cost of financing the national debt increases, causing rising interest rates and inflation
# 2 and 3
Which TWO the following conditions are generally TRUE when the yield curve inverts? 1. Interest rates are relatively low 2. Interest rates are relatively high 3. Interest rates are expected to fall 4. Interest rates are expected to rise
# 2 and 3
Which of the following item(s) are listed on the income statement? 1. Assets 2. Liabilities 3. Retained Earnings 4. Operating Expenses
# 4
Growth stocks would typically have which TWO of the following characteristics? 1. High price/earnings ratios 2. High dividend-payout ratios 3. Low price/earnings ratios 4. Low dividend-payout ratios
#1 and 4
Which of the following statements is TRUE if interest rates are lower in the U.S. than they are overseas?
U.S. investors will invest overseas.
Which of the following items is found on a balance sheet?
Equipment
Describe a defensive stock:
-Has smaller reactions to the economic movement -Tend to do better under the contraction phase of the business cycle EX: Ulitilty, Tobacco, Alcohol, Cosmetic, food, pharmaceutical
Describe a cyclical stock:
-Performance tends to be parallel to changes in the economy -Tends to do well during the expansion phase of the business cycle EX: Machine/tool companies, construction firms, transportation, automotive
What are some tools the fed may use to help the economy?
-Regulation T -Discount rate -Reserve requirement -FOMC
What does it mean to be keynesian?
-You believe the best way to help a struggling economy is government intervention -You want fiscal policy -You want to influence taxes and expenditures -The president and congress are responsible of implementation
What do it mean to be monetarist?
-You want to influence the money supply and interest rates to help a struggling economy -You want monetary policy -the federal reserve board(FRB) is responsible for implementation
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?
1.6
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?
2-to-1
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?
8 times
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?
8:3
Which of the following yields results in the highest real inflation-adjusted rate of return?
A bond yields 8% when inflation is at 3%
What is the federal open market committee(FOMC)?
A committee that trades U.S. treasuries through the open market to help the economy
If the economy is experiencing rising inflation, this will generally lead to:
A decrease in bond prices
When comparing value stocks to growth stocks, one difference is that value stocks have which of the following characteristics?
A low price-to-book value
What is the debt to equity ratio?
A measure of a firm's leverage Debt ➗ Equity
What is the quick ratio?
A measure of liquidity (current assets - inventory) ➗ current liabilities
What is working capital?
A measure of liquidity current assets - current liabilities
What is the current ratio?
A measure of liquidity current assets ➗ current liabilities
What is the Price/Earnings ratio(P/E)?
A measure of market valuation market price of one share ➗ earnings per share
What is earnings per share(EPS)?
A measure of profitability (net income - preferred stock)➗common shares outstanding
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 value stock
What is the relationship of interest rates and foreign currencies?
An inverse relationship, a rising interest rate will strengthen the dollar in relation to other currencies
The balance sheet equation is:
Assets - Liabilities = Net Worth
Which of the following choices is a lagging economic indicator?
Average prime 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?
Based on the company's debt-to-capital and debt-to-equity ratios, it has sufficient long-term liquidity.
What does the FOMC do to increase money supply and lower interest rates?
Buy securities and engage in repos
The amount of money an issuer receives in a stock offering in excess of the par value is recorded on the balance sheet as:
Capital surplus
A fundamental analyst could use a corporation's balance sheet to determine all of the following measurements, EXCEPT:
Cash flow
If the average current ratio for a sector is 2.0, which of the following companies has the best short-term outlook?
Company A with a current ratio of 3.5
Who enacts fiscal policy?
Congress
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?
Contraction
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?
Current Ratio
A fundamental analyst, evaluating the common stock of a corporation, would examine all of the following, EXCEPT the:
Current amount of short interest positions for the stock
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:
Current ratio
What's the formula used to calculate the price to earnings ratio?
Current stock price divided by the earnings per share last year
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?
Cyclicals, such as transports and technology
If an analyst wants to measure the degree to which a company or partnership is leveraged, he would calculate the:
Debt-to-total capital ratio, which is debt / total capital
A significant decline in the general level of prices is referred to as:
Deflation
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:
Deflation
Which of the following items is NOT included in an income statement?
Dividends payable
All of the following statements concerning the differences between emerging and developed markets are TRUE, EXCEPT the statement that companies in:
Emerging markets operate in a more regulated environment
All of the following would indicate inflationary pressure on the economy, EXCEPT:
Falling industrial production
What is the difference between a favorable and unfavorable balance of trade?
Favorable -A decline in the dollar in relation to other currencies -When the U.S. exports more than it imports Unfavorable -An increase in the dollar in relation to other currencies -When the U.S. imports more than it exports
What type of investment analysis uses financial data that's specific to one issuer to make investment decisions?
Fundamental analysis
Which of the following items is NOT included in an income statement?
Goodwill
In determining the gross profit margin, an analyst would subtract the:
Gross profit from sales, divided by sales
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?
Growth
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:
Growth investor
All of the following would normally be characteristics of a growth company, EXCEPT:
High dividend payout ratio
The manager of a value fund would look for securities with which of the following characteristics?
High dividend yields
In calculating a company's market capitalization, the treasury stock of a corporation is:
Ignored
Which of the following choices is NOT considered to be a leading economic indicator?
Industrial production
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:
Insufficient to meet its short-term obligations
Value investors would be interested in companies that have:
Low price earnings ratios
Which of the following is a precursor to inflation?
Low unemployment
Which of the following choices is an example of a variable cost?
Material used in the production of a product
When calculating the current ratio of a corporation, all of the following are included, EXCEPT:
Net income
An investor wishing to calculate the basic earnings that a corporation capitalized with common and preferred stock and convertible bonds would divide the:
Net income minus any preferred dividends paid by the number of common shares outstanding
A yield curve that rises as maturities lengthen is a(n):
Normal yield curve
A U.S. manufacturer imports steel from Japan. The company manufactures the steel into parts and exports them for sale into Japan. The yen has recently devalued. All of the following items will decrease, EXCEPT:
Operating expenses
During which phase of the business cycle will an investor experience a decrease in purchasing power?
Peak
During periods of deflation, the FRB will likely:
Purchase securities in the open market
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?
Purchasing power has increased
Which FRB tools determines the amount of money that member banks must keep on deposit?
Reserve requirements
What does a basic corporate income statement look like?
Revenue(sales) - COGS = Gross profit Gross Profit - Operating expense = Operating Income Operating Income +/- other income/expenses = EBIT EBIT - interest = Taxable income Taxable income - Tax = Net income/loss
What is the prime rate?
The rate a bank charges their best customers on short-term borrowings.
Value investing is:
Risky because it's contrarian
Fundamental analysis involves evaluating:
Sales growth and other information from an issuer's financial statements
What are shares outstanding?
Shares that a company buys back from its share holders Shares issues - treasury stock
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?
Small capitalization
Detailing a company's net income is accomplished by:
Subtracting expenses from revenues
A technical analyst will consider which of the following?
Supply and demand figures
Currency values in a floating-rate system are established by:
Supply and demand for the currency
Price charts, patterns, and areas of support and resistance are used in:
Technical analysis
What type of investment analysis uses patterns and pricing trends to make investment decisions?
Technical analysis
Which type of investment analysis uses daily moving average price data and pricing trends to make investment decisions?
Technical analysis
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?
Technology
Which of the following indexes or averages is made up of the largest number of stocks?
The Wilshire Associates Equity Index
What's the book value of an asset?
The acquisition cost of an asset less depreciation or amortization
What does a leverage ratio measure?
The amount of additional debt that an issuer can assume
Which of the following would be used to determine the debt-to-equity ratio?
The balance sheet
All of the following are true regarding the balance of payments, EXCEPT:
The capital account shows the results for trade transactions completed in the current year
What does a debt-to-equity ratio of 1-to-1 signify?
The company is highly leveraged
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?
The company's price-to-earning ratio is 10.
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?
The current ratio increases
Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be:
The dollar declining relative to our trading partners' currencies
What is the call money rate?
The rate charged by banks on collateralized loans to Broker-Dealers
What is the reserve requirement?
The rule that every bank must have a certain amount of cash and negotiable securities on hand at all times
Which of the following tools is NOT directly controlled by the FRB?
The fed funds rate
An investor might purchase a stock with a high P/E ratio because:
The investor expects higher future earnings
If a corporation were to issue bonds with warrants attached, all the following characteristics would be a benefit to the corporation, EXCEPT:
The issue would increase the debt to equity ratio of the company
What can be used to estimate a company's cash flows?
The issuer's annual report
What does the price-to-book ratio measure?
The market value of a company's stock relative to the accounting value of the company
If you were examining a balance sheet, you would expect to see:
The number of common shares outstanding
All of the following shares are included when calculating a company's market capitalization, EXCEPT:
The number of shares that have been 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?
The price of the company's stock has fallen.
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?
The stock price decreased.
What is market capitalization and its formula?
The value of all of its shares market price per share x # of shares outstanding
A company has a debt-to-equity ratio of 1.0. What does this signify?
The value of debt and shareholders' equity on the company's financial statements is equal.
If the Wilshire 5000-to-GDP ratio is high, what would a technical analyst suggest that it means about U.S. equities?
They're overvalued
How is the book value of a company calculated?
Total Assets - Total Liabilities
Which of the following is a leverage ratio?
Total Debt/Total Equity
If a company's total assets remain the same but stockholders' equity decreases, which of the following statements is TRUE?
Total liabilities increase
The phase of the business cycle that represents the bottom of the economy's decline is:
Trough
True or False? A U.S. company that manufactures overseas will have a lower cost if the dollar rises and a higher cost if the dollar falls.
True
True or False? A U.S. company that sells overseas will have a lower revenue if the dollar rises and a higher revenue if the dollar falls.
True
True or False? The feds regulate the discount rate?
True
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?
Value
A U.S. portfolio manager that anticipates receiving an interest payment in a foreign currency would be concerned that the currency might:
Weaken against the dollar
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?
Working capital
The difference between a corporation's current assets and its current liabilities is called:
Working capital
The difference between a corporation's current assets and its current liabilities is the:
Working capital
What is the order of the business cycle?
expansion, peak, contraction, trough
What is the federal funds rate?
the interest rate banks charge each other for overnight loans
What is the discount rate?
the minimum interest rate set by the Federal Reserve for lending to other banks.