FSA Final - Chapter 1
QN=09 Which of the following statements concerning financial ratios is incorrect? a. Accounting principles and methods used by a company will not affect financial ratios. b. The informational value of a ratio in isolation is limited. c. A ratio is one number expressed as a percentage or fraction of another number. d. Calculation of financial ratios is not sufficient for a complete financial analysis of a company
A
QN=12 Which of the following statements is correct? a. The more efficiently a company utilizes its assets, the greater its return on investment, all other things being equal. b. If return on equity increases, the return on assets must have also increased. c. If the number of days inventory is held increases, the return on assets will increase, all other things being equal. d. If the gross margin decreases, the inventory turnover must have increased, all other things being equal.
A
QN=11 Liquidity of a company is generally defined as a measure of: a. the ability of a company to pay its employees in a timely manner. b. the ability to pay interest and principal on all debt. c. the ability to pay dividends. d. the ability to pay current liabilities.
D
QN=13 Which of the following statistics would be the most useful in determining the efficiency of a car rental company? a. Inventory turnover b. Number of employees per car rental c. Average length of car rental d. Number of days cars are rented as a percentage of number of days available for rent
D
QN=14 Which of the following ratios does not relate to market price of a company under analysis? a. Price-to-earnings b. Earnings yield c. Price-to-book d. Return on common equity
D
QN=16 Which of the following statements is incorrect? a. It is possible for some markets to be more efficient than others. b. It is possible for markets to be efficient with respect to some information and inefficient with respect to other information. c. The market is likely to be more efficient with respect to companies where there is greater analyst following. d. The market is totally efficient with respect to companies providing regular dividends to investors.
D
QN=18 Which of the following statements regarding the intrinsic value of a company is correct? a. It can be calculated as book value plus the present value of future expected dividends, discounted at the cost of equity capital. b. It can be calculated as present value of future expected dividends, discounted at the cost of debt. c. It can be calculated as present value of future expected residual income, discounted at the cost of equity capital. d. It can be calculated as book value plus the present value of future expected residual income, discounted at the cost of equity capital
D
QN=19 Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio: a. will have a higher inventory turnover ratio. b. will have a lower inventory turnover ratio. c. will have higher earnings growth. d. will have lower earnings growth.
D
QN=20 Which of the following statements is most correct? a. Technical analysis concerns itself with determining the intrinsic value of a stock. b. Active investing is defined as buying and selling stock within six months. c. Fundamental analysis attempts to value a company by examining the past prices patterns of a company's stock. d. Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis.
D
QN=22 You wish to compare the performance of two companies. Which of the following statements is most likely to be incorrect? a. If the companies operate in different industries, this will hinder comparability. b. The use of different accounting methods will hinder comparability. c. If the companies are of significantly different sizes, this will hinder comparability. d. If companies have different auditors, this will hinder comparability.
D
QN=23 Which of the following is not an equity valuation model? a. Residual income model b. Dividend discount model c. Free cash flow to equity model d. Terminal value model
D
QN=25 Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.
true
QN=29 Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.
true
QN=30 Common size statements are useful for inter-company comparisons.
true
QN=31 Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm.
true
QN=32 If a company has no liabilities its return on equity will equal its return on assets.
true
QN=33 The current ratio will always be greater than or equal to the acid test ratio.
true
QN=35 When calculating the return on assets you should use average total assets.
true
QN=37 Earnings Yield is the reciprocal of the price/earnings ratio.
true
QN=41 All other things being equal, the lower a company's cost of equity the higher its stock price should be.
true
QN=42 A creditor's risk is said to be asymmetric because the downside is limited to the required interest payments.
true
QN=43 Prospective analysis is the forecasting of future payoffs—typically earnings and cash flows, or both.
true
QN=04 The Management Discussion and Analysis Section of the annual report: a. is required by the SEC. b. is optional but normally included in the annual report. c. is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company. d. is required by the SEC only if they have a qualified audit opinion.
A
QN=02 Which of the following would not be considered a source of financing? a. Notes receivable b. Common stockholders' equity c. Retained earnings d. Debentures
A
QN=04 On January 1, 2005, Systil Corporation issues $50M 10 year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006 is 8%, what will be the price of the bonds be at this date? a. $56.71M b. $56.25M c. $44.24M d. $43.86M
A
QN=05 Which of the following is not a common tool used in financial statement analysis? a. Random walk analysis b. Ratio analysis c. Common size statement analysis d. Trend series analysis
A
QN=01 Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy? a. Auditor's letter b. Management discussion and analysis c. Proxy statement d. Footnotes
B
QN=03 How much would you be prepared to pay for a $500 bond which comes due in 5 years and pays $80 interest annually assuming your required rate of return is 8% (pick closest answer)? a. $740 b. $660 c. $608 d. $500
B
QN=21 Which of the following statements is incorrect? a. Current assets are expected to be converted into cash sooner than noncurrent assets. b. Equity investors have unlimited downside exposure if the company declares bankruptcy. c. Paid-in capital of company is not affected by the payment of dividends. d. Retained earnings at the inception of a company equals zero.
B
QN=03 If a company receives an unqualified audit opinion it means the auditors: a. did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements. b. are providing assurance that the company will remain financially viable for at least the next year. c. are providing assurance that the company's financial statements fairly present company's financial performance and position. d. are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.
C
QN=05 A company issues 12%, 10-year $1,000 bonds paying interest semi-annually. Required return for bonds of this risk is 15%. At what price will the bond be sold (pick closest answer)? a. $663 b. $849 c. $ 847 d. $ 894
C
QN=06 As of December 31, 2005, two otherwise identical companies in the same industry, East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking forward one year, which outcomes are least likely? I. East Co. requires debt financing. II. West Co. increases its dividend payout. III. West Co.'s share price is twice that of East Co. IV. East Co. repurchases outstanding shares. a. I and II b. II and IV c. I, II and III d. II, III and IV
C
QN=08 While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability? a. Highest net income b. Highest retained earnings c. Highest return on equity d. Highest operating margin
C
QN=15 The semistrong efficiency of market implies that: a. stock prices fully reflect all inside information. b. stock prices do not reflect information contained in past trading volume. c. stock prices fully reflect all information found in 10-K filing d. stock prices fully reflect all information about future price changes.
C
QN=17 Which of the following ratios would be considered useful in assessing operating profitability? a. Debt/Equity ratio b. Acid test ratio c. Gross profit margin d. Return on equity
C
QN=07 Which of the following, if increased by 10%, results in a 10% higher stock price? a. Dividend yield b. Earnings yield Net profit margin Net profit margin d. None of the above
D
QN=10 Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity? a. Acid test ratio b. Current ratio c. Days to collect receivables d. Days goodwill held
D
QN=01 You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.What is your estimate of price per share using the dividend discount model at 12/31/05? a. $20.62 b. $21.65 c. $23.56 d. $24.74
D
QN=02 You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.What is your estimate of price using the residual income valuation model at 12/31/05? a. $20.62 b. $21.65 c. $23.56 d. $24.74
D
QN=06 A common size income statement would typically be prepared by dividing: a. all items on income statement in Year t by their corresponding value in Year t-1. b. all items on income statement in Year t by their corresponding balance sheet accounts in Year t. c. all items on income statement in Year t by net income in Year t-1. d. all items on income statement in Year t by sales in Year t.
D
QN=07 When conducting comparative analysis by reviewing consecutive balance sheets, a. all items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1. b. all items on the balance sheet in Year t-1 must be subtracted from their corresponding value in Year t. c. all items on the balance sheet in Year t must be divided by net income in Year t-1. d. Both A and B are correct.
D
QN=24 Financial statement analysis is an exact science.
false
QN=26 The value of a bond is equal to the sum of the present value of future expected interest and principal payments, discounted at the coupon rate.
false
QN=27 The statement of cash flows is separated into four parts: operating, investing, financing and planning.
false
QN=28 The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements.
false
QN=34 The current ratio is used to evaluate the company's operating performance.
false
QN=36 Debt-to-equity ratio is a commonly used measure of liquidity.
false
QN=38 Dividend yield is defined as dividends divided by shareholders' equity.
false
QN=39 A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company.
false
QN=40 When comparing two companies the company with the highest net income should normally have the highest stock price.
false