Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
64. In the U.S. balance of payments, the federal deficit and military contract awards are ____ of aggregate economic
activity.
a.
leading indicators
b.
coincident indicators
c.
lagging indicators
d.
lot categorized indicators
e.
lot indicators
65. Which of the following series does NOT include the long-leading index?
a.
Dow Jones Industrial Average
b.
Dow Jones Bond Prices, Percent Face Value
c.
Price to Unit Labor Cost
d.
M2 Money Supply, Deflated
e.
New Building Permits
66. Which of the following variables was NOT considered significant in explaining stock returns?
a.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
c.
d.
e.
67. The correlation of stock market returns between the U.S. and Japan is ____ and ____.
a.
high, increasing.
b.
high, decreasing.
c.
low, increasing.
d.
low, decreasing.
e.
low, remaining constant.
68. Which of the following is NOT an analytical measure used by the Conference Board to examine behavior within a
series?
a.
diffusion indexes
b.
rates of change
c.
direction of change
d.
ratios among series
e.
comparison with previous cycles
69. Excess liquidity is defined as
a.
the year-to year percentage change in the M2 money supply less the year-to-year percentage change in the
nominal GNP.
b.
the growth rate in the M2 money supply less the growth rate in the M1 money supply.
c.
the year-to-year percentage change in the M1 money supply less the year-to-year percentage.
d.
the year-to-year percentage change in the “real” GNP less the year-to-year percentage change in the nominal
GNP.
e.
None of these are correct.
70. Which of the following is NOT normally associated with cyclical indicators?
a.
the Securities and Exchange Commission
b.
the Conference Board
c.
Business Week
d.
Center for International Business Cycle Research
e.
All of these are correct.
71. Which of the following is NOT a reason given for why forecasters are so often incorrect?
a.
There is a temptation for economic forecasters to stay fairly close to the “norm,” that is, “group think.”
b.
Many analysts are simply too short-sighted.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
c.
Economists and economic forecaster often suffer from information overload.
d.
Some economic forecasters are too broad-minded, as they try to include a number of ideas in their forecasts.
e.
None of these are correct (that is, all are reasons cited for why forecasters are often incorrect).
72. The Conference Board has derived the following indicator series in order to monitor business cycles:
a.
M2, leading, and lagging
b.
leading, coincident, and consumer expectations
c.
leading, coincident, and lagging
d.
leading, coincident, and M
e.
consumer expectations, leading, and lagging
73. An examination of the relationship between stock prices and the economy has shown that the relationship is
a.
weak and that stock prices turn after the economy does.
b.
nonexistent.
c.
strong and that stock prices turn after the economy does.
d.
strong and that stock prices turn before the economy does.
e.
weak and that stock prices turn before the economy does.
74. Which of the following economic series are included in the Conference Board coincident indicator group?
a.
employees on nonagricultural payrolls
b.
change in consumer price index for services
c.
index of consumer expectations
d.
spread of 10-year Treasury yield less fed funds
e.
index of stock prices
75. Which of the following economic series are included in the Conference Board lagging indicator series?
a.
vendor performance
b.
index of industrial production
c.
manufacturing and trade sales data in 1992 dollars
d.
manufacturers’ new orders, non-defense capital goods
e.
average duration of unemployment in weeks
76. The initial effect of a change in monetary policy appears in ____ and only later in ____.
a.
the aggregate economy, financial markets
b.
financial markets, the aggregate economy
c.
bond markets, stock markets
d.
stock markets, bond markets
e.
stock markets, the aggregate economy
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
77. If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock
prices to
a.
rise.
b.
rise and then decline.
c.
remain unchanged.
d.
decline.
e.
decline and then rise.
78. If interest rates rise due to inflation, and expected cash flows to a firm rise, then you would expect stock prices to
a.
rise.
b.
rise and then decline.
c.
rise and then decline.
d.
decline.
e.
decline and then rise.
79. Which of the following economic series is NOT included in the Conference Board leading indicator group?
a.
average weekly initial claims for unemployment
b.
index of 500 consumer stock prices
c.
real money supply, M2
d.
index of industrial production
e.
All of these are correct (that is, all are included in the lagging indicator group).
80. Which of the following economic series is NOT included in the Conference Board lagging indicator group?
a.
average duration of unemployment
b.
ratio of manufacturing and trade inventories to sales
c.
number of employees on nonagricultural payrolls
d.
percentage change in the labor cost per unit of output in manufacturing
e.
All of these are correct (that is, all are included in the lagging indicator group).
81. Which of the following economic series is NOT included in the Conference Board coincident economic indicator
group?
a.
total value of commercial loans
b.
employees on nonagricultural payrolls
c.
personal income less transfer payments
d.
industrial production
e.
manufacturing and trade sales
82. There are several techniques available to help an investor make a market decision. Which of the following is NOT
such an analysis technique?
a.
macro techniques that are based on the strong relationship between the economy and security markets
b.
micro techniques that estimate future market values by applying one of several basic valuation models to
equity markets
c.
technical analysis in which an investor analyzes past and recent market movements for indications of future
performance
d.
fundamental analysis that considers the effect of market on the entire portfolio
e.
None of these are correct (that is, all are techniques available to make market decisions).
83. Which of the following is NOTa factor under the Free Cash Flow to Equity (FCFE) Model?
a.
depreciation expense
b.
capital expenditure
c.
change in working capital
d.
principal debt repayment
e.
earnings multiplier
84. Expected earnings per share estimates requires all of the following EXCEPT
a.
a sales per share estimate.
b.
a GDP estimate.
c.
an aggregate operating profit margin estimate
d.
an estimate of the real risk-free rate.
e.
a tax rate estimate.
85. The dividend payout ratio, the required rate of return on common equity, and the expected growth rate of stock
dividends are the major variables that affect
a.
the profit margin for the S&P Industrials Index.
b.
the earnings multiplier for common stock.
c.
aggregate tax revenues.
d.
capital gains tax revenues.
e.
aggregate GDP.
86. Aggregate return on equity increases as
a.
profit margins increase.
b.
total asset turnover increases.
c.
financial leverage increases.
d.
equity turnover decreases.
e.
All of these are correct.
87. All of the following factors affect the required rate of return EXCEPT
a.
the economy’s risk-free rate.
b.
corporate business risk.
c.
return on equity.
d.
country risk.
e.
expected rate of inflation.
88. The growth rate (g) of dividends is affected by all of the following EXCEPT
a.
required return.
b.
retention rate.
c.
total asset turnover.
d.
financial leverage.
e.
net profit margin.
89. Unit labor costs, the rate of inflation, the level of foreign competition, and the capacity utilization rate were variables
tested by Finkel and Tuttle as determinants of the
a.
balance of payments.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
the exchange rate.
c.
aggregate operating profit margin.
d.
aggregate profit margin.
e.
aggregate cost margin.
90. Which of the following is NOT a determinant of the aggregate gross profit margin?
a.
unit labor costs of production
b.
rate of inflation
c.
unemployment rate
d.
level of foreign competition
e.
growth rate of M2 money supply
91. Which of the following is NOT a major variable that affects the aggregate stock market earnings multiplier in a
country?
a.
required rate of return on common stock in the country
b.
expected growth rate of dividends for the stocks in the country
c.
composite dividend-payout ratio for common stocks in country
d.
composite debt to equity ratio for firms in the country
e.
All of these are correct (that is, all are major variables for a country’s aggregate stock market earnings
multiplier).
92. The growth rate will most likely increase if the
a.
retention ratio decreases.
b.
payout ratio decreases.
c.
return on equity decreases.
d.
net income increases.
e.
gross income decreases.
93. When applying the earnings multiplier model, all of the following will cause the required rate of return, k, to change
EXCEPT
a.
changes in the real risk-free rate.
b.
changes in the retention rate.
c.
changes in the rate of inflation.
d.
changes in the risk premium for common stock.
e.
All of these are correct (that is, all of these changes will cause a change in the required rate of return).
94. If, for the S&P Industrials Index, the profit margin was 0.35 and the equity turnover ratio was 10, the ROE would be
a.
0.035 percent.
b.
2.857 percent.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
c.
3.500 percent.
d.
28.57 percent.
e.
35.00 percent.
95. If, for the S&P Industrials Index, the profit margin was 0.30 and the equity turnover ratio was 11, the ROE would be
a.
0.033 percent.
b.
3.300 percent.
c.
33.00 percent.
d.
36.70 percent.
e.
333.00 percent.
96. If, for the S&P Industrials Index, the profit margin was .25 and the equity turnover ratio was 12, the ROE would be
a.
0.83 percent.
b.
0.48 percent.
c.
3.00 percent.
d.
30.00 percent.
e.
48.00 percent.
97. If, for the S&P Industrials Index, the profit margin was 0.20 and the equity turnover ratio was 13, the ROE would be
a.
0.026 percent.
b.
2.600 percent.
c.
6.500 percent.
d.
26.00 percent.
e.
65.00 percent.
98. The dividend payout ratio for the aggregate market is 55 percent, the required rate of return is 15 percent, and the
expected growth rate for dividends is 7 percent. Compute the current earnings multiple.
a.
3.93
b.
78.6
c.
6.88
d.
39.3
e.
7.89
99. The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 13 percent, and the
expected growth rate for dividends is 8 percent. Compute the current earnings multiple.
a.
7
b.
13
c.
4.61
d.
14.61
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
e.
15
100. The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 12 percent, and the
expected growth rate for dividends is 6 percent. Compute the current earnings multiple.
a.
5.41
b.
16.25
c.
6.25
d.
10.83
e.
11.58
101. The dividend payout ratio for the aggregate market is 50 percent, the required rate of return is 16 percent, and the
expected growth rate for dividends is 6 percent. Compute the current earnings multiple.
a.
5
b.
2.81
c.
7.5
d.
4
e.
3
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent.
Because investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require
a 15 percent return. The return on equity will be 12 percent.
102. Refer to Exhibit 9.1. What is the expected sustainable growth rate?
a.
2.80 percent
b.
4.20 percent
c.
5.25 percent
d.
7.80 percent
e.
9.75 percent
103. Refer to Exhibit 9.1. What is your expectation of the market P/E ratio?
a.
8.33
b.
5.33
c.
9.03
d.
6.02
e.
3.24
104. Refer to Exhibit 9.1. To what price will the market rise if the earnings expectation is $22.00 per share?
a.
$183.26
b.
$132.41
c.
$198.66
d.
$71.28
e.
$14.30
Exhibit 9.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent.
Because investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require
a 15 percent return. The return on equity will be 12 percent.
105. Refer to Exhibit 9.2. What is the expected sustainable growth rate?
a.
9.0 percent
b.
7.2 percent
c.
6.0 percent
d.
3.0 percent
e.
3.6 percent
106. Refer to Exhibit 9.2. What is your expectation of the market P/E ratio?
a.
3.92
b.
6.25
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
c.
6.67
d.
8.33
e.
12.00
107. Refer to Exhibit 9.2. To what price will the market rise if the earnings expectation is $32.00?
a.
$384.00
b.
$266.56
c.
$213.44
d.
$200.00
e.
$125.44
Exhibit 9.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent.
Because investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require
a 7 percent return. The return on equity will be 13 percent.
108. Refer to Exhibit 9.3. What is the expected sustainable growth rate?
a.
5.85
b.
7.15
c.
4.05
d.
6.75
e.
8.25
109. Refer to Exhibit 9.3. What is your expectation of the market P/E ratio?
a.
37.69
b.
24.92
c.
58.15
d.
55.02
e.
47.82
110. Refer to Exhibit 9.3. To what price will the market rise if the earnings expectation is $1.5?
a.
$138.42
b.
$90.36
c.
$71.74
d.
$105.30
e.
$85.14
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long-term government bonds falls to 9 percent.
Because investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require
a 16 percent return. The return on equity will be 14 percent.
111. Refer to Exhibit 9.4. What is the expected sustainable growth rate?
a.
4.95
b.
7.2
c.
8.8
d.
6.3
e.
7.7
112. Refer to Exhibit 9.4. What is your expectation of the market P/E ratio?
a.
5.42
b.
7.14
c.
6.63
d.
6.25
e.
5.11
113. Refer to Exhibit 9.4. To what price will the market rise if the earnings expectation is $10.00?
a.
$71.40
b.
$66.30