978-0134083308 Chapter 7 Part 1

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Fundamentals of Investing, 13e (Smart)

Chapter 7 Analyzing Common Stocks

7.1 Learning Goal 1

1) The top down approach to security analysis starts with top management and then examines

production and marketing strategies.

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2) Company analysis is only concerned with how a company has performed in the past.

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3) Advocates of the efficient market hypothesis would argue that it is virtually impossible for

any investor to consistently outperform the market.

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4) Economic analysis is concerned with how the general state of the economy will impact the

performance of a particular company within a particular industry.

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5) Investors who believe that most securities are efficiently priced should not not be concerned

with fundamental analysis.

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6) Fundamental analysis can only be profitable if some securities are at least temporarily

mispriced.

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7) Markets can only be efficient if many competent analysts are performing fundamental

analysis.

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8) One of the basic premises of security analysis, and in particular fundamental analysis, is that

A) a stock’s price is based on its past cash flows rather than on anticipated future cash flows.

B) market sectors do not move in concert with business cycles.

C) all securities have an intrinsic value that their market value will approach over time.

D) a security’s risk has relatively little effect on the security’s return.

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9) The intrinsic value of a security is based on the

I. amount of risk.

II. current market value of the security.

III. discount rate applicable to the security.

IV. estimated future cash flows from the security.

A) I and III only

B) III and IV only

C) I, II and III only

D) I, III and IV only

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10) The three steps in determining a stock’s intrinsic value are

I. estimating the stock’s future cash flows.

II. estimating the risk associated with future cash flows.

III. careful analysis of patterns in the stock’s recent price history.

IV. estimating an appropriate discount rate to apply to future cash flows.

A) II, III and IV only

B) I, II and IV only

C) I, III and IV only

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11) The basic motivation of security analysis is to help investors

A) identify the best times to buy and sell securities.

B) contribute to the efficiency of securities markets.

C) identify securities whose intrinsic values are at or near their market values.

D) identify mispriced stocks.

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12) Top-down security analysis

A) starts with the fundamental analysis of a firm.

B) includes economic, industry, and fundamental analysis.

C) concentrates on the competency of the senior management of a firm.

D) centers on the past performance of a firm.

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13) The normal sequence in performing top down analysis is

A) competition, consumer demand, threat of substitute products.

B) market conditions, risk, company fundamentals.

C) economy, industry, company.

D) profitability, efficiency, liquidity.

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14) Fundamental analysis involves the in-depth study of the

A) role of nondiversifiable risk in an investor’s portfolio.

B) financial condition and operating results of a given firm.

C) pattern of security prices as revealed in chart formations.

D) role of diversifiable risk in an investor’s portfolio.

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15) Investment analysts who believe that a thorough investigation of a company’s financial

condition, product development, management and other intrinsic factors can discover stocks

that are priced above or below their intrinsic value are advocates of

A) fundamental analysis.

B) behavioral analysis.

C) the efficient market hypothesis.

D) technical analysis.

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7.2 Learning Goal 2

1) Most firms tend to be more profitable and have higher stock values when the economy is

strong.

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2) The purpose of economic analysis is to gain an insight into the underlying health or vitality

of the economy and to formulate expectations about future security prices.

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3) The business cycle reflects economic changes only in the industrial sectors of the economy.

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4) The best time to buy stock is at the peak of an economic cycle.

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5) Developing a general economic outlook assists in the identification of industries and firms

that might be good investment opportunities.

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6) Federal budget deficits tend to further depress an already depressed economy.

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7) Changes in stock prices tend to lag changes in level of economic activity by several months.

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8) Interest rates and stock prices tend to rise and fall together.

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9) Which measure of the business cycle represents the market value of all goods and services

produced in a country over a twelve-month period?

A) industrial production index

B) money supply

C) gross domestic product

D) productivity average

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10) Which one of the following is likely to have a negative effect on stock prices?

A) falling interest rates

B) a decrease in the money supply (M2)

C) low inflation

D) a decrease in the unemployment rate

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11) The Federal Reserve through monetary policy can help expand the economy by

A) lowering income taxes on individuals.

B) reducing tariffs such that foreign exports can increase.

C) supporting a moderate growth of the money supply.

D) increasing government spending on the national infrastructure.

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12) Rising interest rates tend to

A) contract the level of economic activity.

B) increase the level of business investment.

C) indicate governmental expansion of the economy.

D) signal the trough of a recessionary market.

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13) The government has an expansionary economic policy when it

A) increases taxes.

B) increases government spending.

C) promotes rising interest rates.

D) limits exports of goods and services.

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14) Rising corporate profits are likely to have the greatest effect on which of the following

industrial sectors?

A) business equipment

B) defense

C) food and agriculture

D) consumer durables

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15) Which of the following businesses will be positively impacted by a weak dollar?

A) retailing

B) imports

C) exports

D) personal services

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16) Which of the following businesses will be negatively impacted by a strong dollar?

A) retailing

B) imports

C) exports

D) automotive

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17) Which of the following tend to signal that stock prices are likely to rise in the future?

I. Employment increases after several months of recession.

II. Interest rates are low compared to the recent past.

III. Major market indexes have just reached record highs.

IV. Housing starts increase after several months of decline.

A) I and II only

B) II and III only

C) I, II and IV only

D) I, II, III and IV

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18) Which of the following are characteristics of an expansionary fiscal policy?

I. Increased government spending on infrastructure projects.

II. Reduction in defense and education budgets.

III. Reduction in employment taxes.

IV. Reduction in government borrowing.

A) I and III only

B) II and III only

C) I, II and IV only

D) I, II, III and IV

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19) Which of the following is most likely to increase in value as the result of a weakening

dollar?

A) an ADR for a foreign telecommunications company

B) stock in a firm that depends heavily on imported raw materials

C) stock in a firm with many accounts payable in foreign currencies

D) stock in a foreign company that depends heavily on exports to the U.S.

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20) Which one of the following statements is correct?

A) Stock prices are independent of the economic cycle.

B) Stock prices change simultaneously with the economy.

C) Stock prices are often start to rise before the end of a recession.

D) Changes in stock prices generally lag changes in the economy.

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21) Name at least three economic variables that the affect the stock market and describe their

effects.

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7.3 Learning Goal 3

1) To predict the demand for an industrial sector, it is essential to understand the economic

forces that affect the industry.

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2) Economic factors such as a weak dollar will have a negative impact on all industrial sectors.

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3) Industries in the rapid expansion stage will be especially sensitive to a slowing economy.

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4) In addition to company reports, Value Line also publishes industry analyses.

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5) The economy will expand more slowly if consumers decided to save more and reduce their

debt levels.

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6) Industry analysis focuses on the amount spent on research and development by individual

companies within the industry.

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