Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
1. Returns from the overall market (or an individual stock) can be thought of as a combination of three factors: earnings
growth, multiple expansion (or contraction), and dividend yield.
a.
True
b.
False
2. Earnings growth and dividend yield will be impacted by GDP growth.
a.
True
b.
False
3. Stock prices move coincidentally with the economy.
a.
True
b.
False
4. The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a
random manner.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
a.
True
b.
False
5. Leading indicators of the business cycle include economic series that reach peaks or troughs before the peaks and
troughs of the overall economy.
a.
True
b.
False
6. Coincident indicators include economic time series that have peaks and troughs that roughly occur at the same time as
the peaks and troughs of overall economic activity.
a.
True
b.
False
7. The economy and the stock market have a strong, consistent relationship, but the stock market generally turns before
the economy does.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
a.
True
b.
False
8. The University of Michigan Consumer Sentiment Index is an example of a leading indicator.
a.
True
b.
False
9. The best known monetary variable is the level of taxes.
a.
True
b.
False
10. In well developed economies, markets are not affected by changes in expected inflation.
a.
True
b.
False
11. One of the economic series included in the Conference Board coincident indicator is the index of industrial
production.
a.
True
b.
False
12. Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging indicator in the Conference Board.
a.
True
b.
False
13. Building permits for new private housing units are listed as a leading indicator by the Conference Board.
a.
True
b.
False
14. Recent studies show that money supply changes have an important impact on stock price movements.
a.
True
b.
False
15. Recent studies indicate that one can earn excess returns in the stock market by forecasting unanticipated changes in
the money supply.
a.
True
b.
False
16. The economic factor assumed to be closely related to stock prices is productivity.
a.
True
b.
False
17. It is important to analyze the economies and security markets before analyzing alternative industries or companies.
a.
True
b.
False
18. Over the last 20 years, increases in the return on equity for the S&P Index have been associated with decreases in
return of assets.
a.
True
b.
False
19. It is more important to estimate future earnings than the future earnings multiplier.
a.
True
b.
False
20. An analysis of U.S. equity markets using the cash flow techniques concludes that the market is not fully valued.
a.
True
b.
False
21. There is a negative relationship between the capacity utilization rate and the profit margin.
a.
True
b.
False
22. Estimating net profit margin directly is difficult because it is so volatile.
a.
True
b.
False
23. An increase in the required rate of return k will increase the P/E ratio.
a.
True
b.
False
24. Future tax rates are difficult to estimate because they are politically influenced.
a.
True
b.
False
25. As the market’s return on equity increases so will the P/E ratio.
a.
True
b.
False
26. It is reasonable to expect corporate sales to be closely related to GNP.
a.
True
b.
False
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
27. Dividend growth is positively related to the return on equity.
a.
True
b.
False
28. Changes in the dividend payout ratio are positively related to changes in the retention rate.
a.
True
b.
False
29. A major advantage of the cyclical indicator approach is that it spans all important major economic sectors, including
the service sector and import-exports.
a.
True
b.
False
30. When estimating a major stock market value using the earnings multiplier approach, near-term estimates of the
required rate of return and growth rate are essential due to the impact of near-term events on cash flows.
a.
True
b.
False
31. The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation
methods.
a.
True
b.
False
32. An increase in the retention ratio will cause a decrease in the growth rate.
a.
True
b.
False
33. Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the
capital expenditures required to maintain and grow the firm and the change in working capital required for a growing
firm.
a.
True
b.
False
34. In the present value of operating free cash flow technique, the firm’s operating free cash flow to the firm is discounted
at the firm’s weighted average cost of capital (WACC).
a.
True
b.
False
35. The best-known measure of relative value for common stock is the P/E ratio.
a.
True
b.
False
36. Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.
a.
True
b.
False
37. The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a
firm’s cash flow is less subject to manipulation than the firm’s earnings per share.
a.
True
b.
False
38. Price-to-sales ratio is still considered the predominant firm valuation technique.
a.
True
b.
False
39. The constant growth dividend growth model is not appropriate for the valuation of growth companies.
a.
True
b.
False
40. The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).
a.
True
b.
False
41. A growth company is one whose stock is undervalued by the market.
a.
True
b.
False
42. A cyclical company’s sales and earnings are heavily influenced by aggregate business activity.
a.
True
b.
False
43. By definition growth companies have growth stocks.
a.
True
b.
False
44. A stock with low systematic risk is considered to be a defensive stock.
a.
True
b.
False
45. A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of
return greater than the firm’s cost of debt.
a.
True
b.
False
46. An undervalued stock is a growth stock.
a.
True
b.
False
47. An overvalued stock is a non-growth stock.
a.
True
b.
False
48. A cyclical stock’s rate of return is not expected to decline during an overall market decline.
a.
True
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
False
49. With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to
buyers.
a.
True
b.
False
50. A defensive company is one whose sales, earnings, and cash flows are strongly correlated with the business cycle.
a.
True
b.
False
51. A firm’s competitive strategy can be either defensive or offensive.
a.
True
b.
False
52. To benefit from cost leadership, a firm must command prices near the industry average.
a.
True
b.
False
53. Two major competitive strategies are low-cost leadership and low-price leadership.
a.
True
b.
False
54. An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the
industry.
a.
True
b.
False
55. Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.
a.
True
b.
False
56. Underpriced stocks can be ranked using the excess return ratio, which is calculated as the Market price/Risk free rate.
a.
True
b.
False
57. Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
a.
True
b.
False
58. One way to measure a company’s intrinsic value is to divide the company’s current dividends by the required return
less the dividend growth rate.
a.
True
b.
False
59. According to Peter Lynch, a favorable attribute of a firm that may result in favorable stock performance is when a
firm’s product is the latest craze.
a.
True
b.
False
60. According to Peter Lynch, a favorable attribute of a firm that may result in favorable stock performance is when a firm
buys back its shares.
a.
True
b.
False
61. Returns from the overall market (or an individual stock) can be thought of as a combination of which of the following
factors?
a.
earnings growth, multiple expansion, and dividend yield
b.
earnings growth, multiple expansion, and annualized return
c.
earnings growth, interest rates, and dividend yield
d.
inflation, multiple contraction, and dividend yield
e.
inflation, contraction, and annualized return
62. The index of leading indicators includes all of the following, EXCEPT
a.
M2 money supply.
b.
S&P 500 index.
c.
orders for plant and equipment.
d.
changes in the sensitive materials price.
e.
index of industrial production.
63. Which of the following are NOT cyclical indicators?
a.
selected series
b.
coincident indicators
c.
diffusion indicators
d.
leading indicators
e.
lagging indicators