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11
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16) Briefly describe and discuss industry analysis and the motivation behind it.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14
Copyright © 2017 Pearson Education, Inc.
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) Fundamental analysis encompasses return, but not risk, in the valuation process.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
3) The statement of cash flows is less influenced than the income statement by choices of
accounting methods.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
4) The income statement indicates how successfully a company has utilized its assets.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
5) Positive cash flow from investing activities is typical of firms experiencing healthy growth.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
6) A company may appear to be profitable on its income statement, but fail to generate strong
cash flows.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
15
7) The balance sheet summarizes the company's operations over the last fiscal year.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
8) EBITDA stands for earnings before inflation, taxes, depreciation, and adjustments.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
16
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
17
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
15) Which of the following measures excludes non-cash charges against income?
A) operating expenses
B) EBIT
C) net income before taxes
D) EBITDA
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
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
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19) Briefly describe fundamental analysis and the basic assumption behind it.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19
7.5 Learning Goal 5
1) Ratio analysis is the study of the relationships between various financial statement accounts.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) Financial ratios can reveal a lot about a company's liquidity, activity, and profitability.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
3) The quick ratio differs from the current current ratio in that accounts receivable are excluded
from current assets.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5) A firm with a very low debt-equity ratio has a low risk of defaulting on its loans.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) A firm with a very low debt-equity ratio might be able to increase return on equity by taking
on additional debt.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
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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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
8) Return on equity (ROE) is computed by dividing net income by the market value of equity.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
9) The PEG ratio divides the stock's current price by the growth rate of earnings over the
preceding 12 months.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
10) In seeking potential stock investments, most analysts look for companies that have PEG
ratios that are equal to or less than one.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11) Banks can use the times interest earned ratio as a measure of a borrower's ability to repay
their loan.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
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.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
