978-0134083308 Chapter 7 Part 2

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7) Investors who conduct industry analyses typically favor companies with strong market

positions over companies with less secure market positions because firms with strong market

positions tend to

I. be price leaders.

II. benefit more from economies of scale.

III. have better R&D programs.

IV. have lower production costs.

A) II and IV only

B) I, II and IV only

C) I, II and III only

D) I, II, III and IV

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8) The consumer electronics industry would be most significantly affected by

A) developments in technology.

B) interest rates and inflation.

C) labor relations.

D) government regulations.

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9) Which of the following factors are considered when analyzing an industry?

I. the nature and conditions of governmental regulations

II. the involvement and relations, if any, with labor unions

III. the development of new technologies relevant to the industry

IV. the extent of competition within the industry

A) I, II and IV only

B) II, III and IV only

C) I, II and III only

D) I, II, III and IV

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10) Which stage of an industry’s growth cycle is most influenced by economic events?

A) initial development

B) stability or decline

C) mature growth

D) rapid expansion

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11) Which stage of an industry’s growth cycle is interesting only for potentially high dividend

payouts?

A) initial development

B) stability or decline

C) mature growth

D) rapid expansion

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12) The rapid expansion phase of an industry is characterized by

A) extreme sensitivity to interest rates and other economic factors.

B) high returns and relatively low risks.

C) willingness of investors to buy almost any stock associated with the industry.

D) many decades of sustained above average growth.

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13) Well managed companies rarely reach the decline stage because

A) the world’s population is growing.

B) they continuously develop new products to meet the needs of changing markets.

C) consumers remain loyal to established brands.

D) all of the above.

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14) Which stage of an industry’s growth cycle offers the greatest opportunity for an investor

who is seeking capital gains?

A) initial development

B) mature growth

C) stability or decline

D) rapid expansion

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15) List and explain the various stages of the growth cycle of an industry. Also discuss the

merit of investing in the industry during each of the various stages.

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16) Briefly describe and discuss industry analysis and the motivation behind it.

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7.4 Learning Goal 4

1) Fundamental analysis is based on the presumption that the value of a stock is influenced by

the financial performance of the issuing company.

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2) Fundamental analysis encompasses return, but not risk, in the valuation process.

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3) The statement of cash flows is less influenced than the income statement by choices of

accounting methods.

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4) The income statement indicates how successfully a company has utilized its assets.

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5) Positive cash flow from investing activities is typical of firms experiencing healthy growth.

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6) A company may appear to be profitable on its income statement, but fail to generate strong

cash flows.

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7) The balance sheet summarizes the company’s operations over the last fiscal year.

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8) EBITDA stands for earnings before inflation, taxes, depreciation, and adjustments.

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9) Calculating the times interest earned ratio using EBITDA is more conservative than using

EBIT because it takes the cost of replacing fixed assets into consideration.

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10) Which of the following are considered in the ratio analysis of a firm?

I. profitability

II. market share

III. liquidity

IV. leverage

A) I and II only

B) I, III and IV only

C) II and IV only

D) I, II, III and IV

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11) Which of the following accounting practices are potentially misleading or even fraudulent?

I. writing off goodwill as an extraordinary loss

II. using accrual rather than cash basis reporting

III. off-balance sheet liabilities

IV. recognizing revenues prematurely

A) I and II only

B) I, II and IV only

C) III and IV only

D) I, III and IV only

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12) Which one of the following statements concerning accounting reports is correct?

A) The income statement reflects the position of a firm as of a single point in time.

B) The total equity of a firm is equal to the total assets plus the total liabilities.

C) The statement of cash flows identifies both the sources and the uses of cash.

D) The income statement reflects the amount of cash available for investment and financing

activities.

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13) Cash flow from operations includes all of the following adjustments to net income

EXCEPT

A) purchases of new equipment.

B) depreciation.

C) increase or decrease in current liabilities.

D) increase or decrease in current inventory.

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14) Which of the following would be typical of a Statement of Cash Flows for a healthy firm in

a sustainable business?

A) Cash flow from operations is negative, cash flows from investment activities and financing

activities are positive.

B) Cash flow from operations , investment activities and financing activities must all be

positive.

C) Cash flow from operations is positive, cash flows from investment activities and financing

activities are negative.

D) If the Statement shows a net increase in cash, the source is unimportant.

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15) Which of the following measures excludes non-cash charges against income?

A) operating expenses

B) EBIT

C) net income before taxes

D) EBITDA

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16) Which of the following would be found on a company’s income statement?

I. cost of goods sold

II. interest expense

III. cash flow from operations

IV. earnings before taxes

A) I an IV only

B) I, II and III only

C) I, II and IV only

D) I, II, III and IV

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17) Which of the following would be found on a company’s balance sheet?

I. Accounts receivable

II. Interest expense

III. Property plant and equipment

IV. Total stockholders’ equity

A) I an IV only

B) I, II and III only

C) I, II and IV only

D) I, III and IV only

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18) On September 30, the Simpson Company reported the following information on its

financial statements.

What is the amount of the stockholder’s equity in the Simpson Company?

A) $243,000

B) $277,000

C) $927,000

D) $3,217,000

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19) Briefly describe fundamental analysis and the basic assumption behind it.

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7.5 Learning Goal 5

1) Ratio analysis is the study of the relationships between various financial statement accounts.

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2) Financial ratios can reveal a lot about a company’s liquidity, activity, and profitability.

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3) The quick ratio differs from the current current ratio in that accounts receivable are excluded

from current assets.

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4) Return on assets is a very important analytical tool because it measures how effectively

management is using a firm’s assets to generate profits.

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5) A firm with a very low debt-equity ratio has a low risk of defaulting on its loans.

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6) A firm with a very low debt-equity ratio might be able to increase return on equity by taking

on additional debt.

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7) The Allied Computer Co. has sales of $300 million, a net profit margin of 9%, and 10

million shares of common stock outstanding. It has no preferred stock outstanding. If Allied

stock trades at $50 per share, it has a price/earnings ratio of 20.9.

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8) Return on equity (ROE) is computed by dividing net income by the market value of equity.

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9) The PEG ratio divides the stock’s current price by the growth rate of earnings over the

preceding 12 months.

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10) In seeking potential stock investments, most analysts look for companies that have PEG

ratios that are equal to or less than one.

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11) Banks can use the times interest earned ratio as a measure of a borrower’s ability to repay

their loan.

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12) If a firm has an equity multiplier of 3, this means that the firm has $3 in equity for every $1

in long-term debt.

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