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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.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
2) Company analysis is only concerned with how a company has performed in the past.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
3) Advocates of the efficient market hypothesis would argue that it is virtually impossible for
any investor to consistently outperform the market.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
5) Investors who believe that most securities are efficiently priced should not not be concerned
with fundamental analysis.
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Question Status: Previous Edition
Learning Goal: Learning Goal 1
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6) Fundamental analysis can only be profitable if some securities are at least temporarily
mispriced.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Markets can only be efficient if many competent analysts are performing fundamental
analysis.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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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.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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Copyright © 2017 Pearson Education, Inc.
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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Learning Goal: Learning Goal 2
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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Learning Goal: Learning Goal 2
3) The business cycle reflects economic changes only in the industrial sectors of the economy.
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Learning Goal: Learning Goal 2
4) The best time to buy stock is at the peak of an economic cycle.
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Learning Goal: Learning Goal 2
5) Developing a general economic outlook assists in the identification of industries and firms
that might be good investment opportunities.
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Learning Goal: Learning Goal 2
6) Federal budget deficits tend to further depress an already depressed economy.
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Learning Goal: Learning Goal 2
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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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
8) Interest rates and stock prices tend to rise and fall together.
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Question Status: New Question
Learning Goal: Learning Goal 2
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
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
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
9
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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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Question Status: Previous Edition
Learning Goal: Learning Goal 2
21) Name at least three economic variables that the affect the stock market and describe their
effects.
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Learning Goal: Learning Goal 2
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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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Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) Economic factors such as a weak dollar will have a negative impact on all industrial sectors.
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Learning Goal: Learning Goal 3
3) Industries in the rapid expansion stage will be especially sensitive to a slowing economy.
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Learning Goal: Learning Goal 3
4) In addition to company reports, Value Line also publishes industry analyses.
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Learning Goal: Learning Goal 3
5) The economy will expand more slowly if consumers decided to save more and reduce their
debt levels.
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Learning Goal: Learning Goal 3
6) Industry analysis focuses on the amount spent on research and development by individual
companies within the industry.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
