FIN 410 midterm review
A top-down analysis of a firm's prospects starts with an analysis of the ____.
U.S. economy or even the global economy
______________ in interest rates are associated with stock market declines.
Unanticipated increases
The process of decomposing ROE into a series of component ratios is called ______________.
DuPont Analysis
Operating ROA is calculated as __________, while ROE is calculated as _________.
EBIT/total assets; net profit/equity
Which of the following is not an example of fiscal policy?
Fed purchases of Treasury securities
Many observers believe that firms "manage" their income statements to _______.
smooth their earnings over time
The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?
start-up phase
A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.
$114.29
Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.76. What is the intrinsic value of the stock?
$178.56
Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?
$25
Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 22% for two years and then at 6% thereafter. If the required return for Deployment Specialists is 11.5%, what is the intrinsic value of its stock?
$25.36
A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.
11.9
The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________.
12.5
A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?
16.6%
The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?
17.02%
A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.
2.88
Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.76. What is the market capitalization rate?
8.8%
Which one of the following statements about market and book value is correct?
Most firms have a market-to-book ratio above 1, but not all.
New-economy companies generally have higher _______ than old-economy companies.
P/E multiples
When a stock price breaks through the moving average from below, this is considered to be ______.
a bullish signal
Which one of the following firms would be described as having below-average sensitivity to the state of the economy?
a defensive firm
The average duration of unemployment is _________.
a lagging economic indicator
Relative strength is ______ indicator.
a technical
Which of the following will result in an increase in cash to the firm?
an increase in accounts payable
An example of a highly cyclical industry is the _________.
automobile industry
Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.
behavioral finance
If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.
below-average
The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.
book value
Which one of the following describes the amount by which government spending exceeds government revenues?
budget deficit
Which of the following assets is most liquid?
cash equivalents
The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.
channel stuffing
Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.
decrease
If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will _________.
decrease
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.
earnings retention ratio will increase
Technical analysis focuses on _____________________.
finding repeating trends and patterns in prices
Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?
food and beverage
The analysis of the determinants of firm value is called _____________.
fundamental analysis
The value of Internet companies is based primarily on _____.
growth opportunities
The constant-growth dividend discount model (DDM) can be used only when the ___________.
growth rate is less than the required return
If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm _________.
has more current liabilities than the industry average
If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio? What about the asset turnover ratio?
increase, increase
A moving average of stock prices _________________.
is less volatile than the actual prices
The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.
leading
An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.
lose market share or reduce its profit margin
The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.
market breadth
A big increase in government spending is an example of a _________.
positive demand shock
The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.
rules-based; principles-based
Economic value added (EVA) is
the difference between the return on assets and the opportunity cost of capital times the capital base.
According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.
the price index pierces the right shoulder
The term quality of earnings refers to ________.
the realism and sustainability of reported earnings
If a stock is correctly priced, then you know that ____________.
the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return
Common-size balance sheets are prepared by dividing all quantities by ____________.
total assets
Moving averages are ______ indicators.
trend
The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.
understate; overstate
You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.
will be higher than the intrinsic value of stock B
