Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
c.
$54.20
d.
$77.00
e.
$51.10
114. Refer to Exhibit 9.5. Calculate the firm’s ROE.
a.
36%
b.
25%
c.
15%
d.
10%
e.
8%
115. Refer to Exhibit 9.5. The firm’s sustainable growth rate is
a.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
c.
d.
e.
116. Refer to Exhibit 9.5. Calculate the P/E multiple.
a.
35
b.
30
c.
25
d.
20
e.
15
117. Refer to Exhibit 9.5. Calculate the firm’s estimated share price.
a.
57.5
b.
37.5
c.
45
d.
32.75
e.
75
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog
Company.
Estimated
Year 2019
Year 2020
GDP
11,000 Billion
GDP growth
3.5%
Sales per share
$800
Operating profit margin
12%
Depreciation/Fixed Assets
14%
Fixed asset turnover
2
Interest rate
3.5%
Total asset turnover
0.7
Debt/Total assets
45%
Tax rate
36%
In addition, a regression analysis indicates the following relationship between growth in sales per share for MacLog, and
GDP growth is
% Sales per share = 0.015 + 0.75(% GDP)
118. Refer to Exhibit 9.6. Calculate GDP for the year 2020.
a.
$10,500 billion
b.
$11,000 billion
c.
$11,385 billion
d.
$10,550 billion
e.
$11,025 billion
119. Refer to Exhibit 9.6. Estimate the firm’s growth rate in sales per share.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
a.
1.5%
b.
2%
c.
2.16%
d.
4.13%
e.
3.73%
120. Refer to Exhibit 9.6. Estimate the firm’s sales per share for the year 2020.
a.
$833.04
b.
$900.08
c.
$885.03
d.
$925.56
e.
$850.75
121. Refer to Exhibit 9.6. Calculate the firm’s year 2020 EBITDA per share.
a.
$95.05
b.
$87.15
c.
$112.56
d.
$104.73
e.
$99.96
122. Refer to Exhibit 9.6. Obtain an estimate of the per share depreciation charge for the year 2020.
a.
$58.31
b.
$102.35
c.
$53.68
d.
$75.93
e.
$65.78
123. Refer to Exhibit 9.6. Calculate the per share EBIT for the year 2020.
a.
$35.53
b.
$41.65
c.
$55.89
d.
$65.14
e.
$75.10
124. Refer to Exhibit 9.6. Calculate the firm’s level of Total Assets per share for the year 2020.
a.
$1050.65
b.
$1065.67
c.
$1113.58
d.
$1190.06
e.
$1385.77
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
125. Refer to Exhibit 9.6. Calculate the firm’s level of debt for the year 2020.
a.
$535.53
b.
$600.75
c.
$637.67
d.
$485.98
e.
$393.72
126. Refer to Exhibit 9.6. Calculate the per share interest rate charge for the year 2020.
a.
$18.74
b.
$14.72
c.
$30.07
d.
$13.76
e.
$28.59
127. Refer to Exhibit 9.6. Calculate the firm’s EBT per share for the year 2020.
a.
$13.29
b.
$27.89
c.
$18.75
d.
$19.63
e.
$22.91
128. Refer to Exhibit 9.6. Calculate the firm’s EPS for the year 2020.
a.
$15.25
b.
$14.66
c.
$17.25
d.
$12.56
e.
$18.57
Exhibit 9.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are using the free cash flow to equity (FCFE) technique to analyze the U.S. equity market. The beginning FCFE is
$90, and the required rate of return is 10 percent. Free cash flows are expected to grow at a 10 percent rate for the next
two years and then grow at a constant rate of 7 percent forever.
129. Refer to Exhibit 9.7. What will FCFE be three years from now?
a.
108.90
b.
116.52
c.
117.00
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
d.
119.79
e.
120.21
130. Refer to Exhibit 9.7. What is the estimated value of the U.S. market today using the FCFE approach?
a.
2,852
b.
2,918
c.
3,210
d.
3,390
e.
3,884
131. Refer to Exhibit 9.7. What would the estimated value of the U.S. market be today using the FCFE approach, if the
growth rate was expected to be a constant 8 percent indefinitely, instead of the 10 percent and 7 percent estimates?
a.
4,500
b.
4,728
c.
4,860
d.
4,923
e.
5,042
132. Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60 percent, the
required rate of return is 11 percent, and the dividend growth rate is 8 percent.
a.
15
b.
20
c.
25
d.
30
e.
35
Exhibit 9.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As an economist for a research firm, you are forecasting the market P/E ratio using the dividend discount model. Because
the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55 percent. Long-term government
bond rates are at 6 percent, and the equity risk premium is estimated to be 3 percent. Return on equity (ROE) is estimated
to be 11 percent.
133. Refer to Exhibit 9.8. What is the expected growth rate?
a.
3.00 percent
b.
3.92 percent
c.
4.95 percent
d.
5.27 percent
e.
6.05 percent
134. Refer to Exhibit 9.8. What is your expectation of the market P/E ratio?
a.
9.17
b.
11.11
c.
13.58
d.
18.33
e.
21.42
Exhibit 9.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected
growth rate for dividends of 4 percent.
135. Refer to Exhibit 9.9. What is the current earnings multiplier?
a.
2.5
b.
5.0
c.
7.5
d.
10.0
e.
12.5
136. Refer to Exhibit 9.9. If the payout ratio changes to 50 percent, but there are no other changes, what will be the new
P/E?
a.
3.25
b.
4.16
c.
5.75
d.
6.25
e.
7.67
137. Refer to Exhibit 9.9. Starting with the initial conditions, you expect the retention ratio to be constant, the rate of
inflation to decline by 2 percent, and the growth rate to decline by 1 percent. What is the expected P/E?
a.
8.57
b.
8.00
c.
6.67
d.
5.71
e.
5.00
138. Refer to Exhibit 9.9. Starting with the initial conditions, you expect the retention ratio to be constant, the rate of
inflation to increase by 2 percent, and the growth rate to increase by 1 percent. What is the expected P/E?
a.
4.44
b.
5.00
c.
5.71
d.
6.67
e.
8.00
139. Toward the end of a recession, which stocks often recover first as their earnings rise?
a.
financial stocks
b.
consumer durable goods
c.
capital goods
d.
cyclical companies
e.
consumer staples
140. _____ do well as the economy recovers.
a.
Financial stocks
b.
Consumer durable goods
c.
Capital goods
d.
Cyclical companies
e.
Consumer staples
141. _____ tend to do well as the economy moves past recovery and into expansion.
a.
Financial stocks
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
Consumer durable goods
c.
Capital goods
d.
Cyclical companies
e.
Consumer staples
142. _____ tend to move in anticipation of the business cycle, turning up in anticipation of recovery and turning down at
signs of economic weakness.
a.
Financial stocks
b.
Consumer durable goods
c.
Capital goods
d.
Cyclical companies
e.
Consumer staples
143. _____ tend to outperform during an economic slowdown.
a.
Financial stocks
b.
Consumer durable goods
c.
Capital goods
d.
Cyclical companies
e.
Consumer staples
144. Porter contends that ____ and ____ are two important competitive strategies.
a.
low cost leadership, barrier to entry
b.
new entrant deterrent, differentiation
c.
low cost leadership, differentiation
d.
differentiation, monopolistic
e.
monopolistic simulation, differentiation
145. Which of the following factors does NOT indicate market liquidity?
a.
number of shareholders
b.
high price volatility
c.
number of shares outstanding
d.
number of shares traded
e.
institutional interest
146. Which of the following statements concerning global company analysis is FALSE?
a.
Analysis of companies within industries should be extended to include foreign companies.
b.
There is a problem in obtaining data that is required for a thorough company analysis of foreign companies.
c.
Foreign companies’ financial risk should be evaluated over time.
d.
Differences in relative measures can be explained by the variations in accounting procedures among countries
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
and investors attitudes within each country.
e.
None of these are correct.
147. A speculative stock possesses a ____ probability of ____ return and is currently ____.
a.
high, negative, underpriced.
b.
high, negative, overpriced.
c.
high, positive, overpriced.
d.
low, negative, overpriced.
e.
low, positive, underpriced.
148. A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high
rates of return.
a.
growth
b.
defensive
c.
cyclical
d.
speculative
e.
value
149. A growth company is one that has the ability to
a.
acquire capital at a low cost and is able to invest in projects that yield an average return.
b.
acquire capital at a low cost and is able to invest in projects that yield a below average return.
c.
acquire capital at an average cost and is able to invest in projects that yield an above average return.
d.
acquire capital at an average cost and is able to invest in projects that yield an average return.
e.
acquire capital at an above average cost and is able to invest in projects that yield an average return.
150. Cyclical companies are firms in which
a.
sales, earnings, and cash flows are extremely uncertain and not necessarily related to the economy.
b.
sales, earnings, and cash flows are likely to withstand changes caused by the economic environment.
c.
sales, earnings, and cash flows are heavily influenced by aggregate business activity.
d.
sales, earnings, and cash flows are growing exponentially.
e.
None of these are correct.
151. Defensive companies are firms in which
a.
sales, earnings, and cash flows are extremely uncertain and not necessarily related to the economy.
b.
sales, earnings, and cash flows are likely to withstand changes caused by the economic environment.
c.
sales, earnings, and cash flows are heavily influenced by aggregate business activity.
d.
sales, earnings, and cash flows are growing exponentially.
e.
None of these are correct.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
152. Speculative companies are firms in which
a.
sales, earnings, and cash flows are extremely uncertain and not necessarily related to the economy.
b.
sales, earnings, and cash flows are likely to withstand changes caused by the economic environment.
c.
sales, earnings, and cash flows are heavily influenced by aggregate business activity.
d.
sales, earnings, and cash flows are growing exponentially.
e.
None of these are correct.
153. When a firm seeks to identify itself as unique in its industry in an area that is important to buyers, it is known as a
a.
defensive strategy.
b.
differentiation strategy.
c.
low-cost strategy.
d.
focused strategy.
e.
value strategy.
154. What variables impact the Price/Sales ratio?
a.
sales growth rate, volatility of sales growth, profit margin
b.
earnings growth rate, volatility of sales growth, profit margin
c.
earnings growth rate, volatility of sales growth, operating margin
d.
sales growth rate, volatility of sales growth, operating margin
e.
sales growth rate, volatility of profit margin, profit margin
155. A growth company may exist for all of the following reasons EXCEPT
a.
the company holds patents.
b.
the company possesses unique distribution or marketing strategies.
c.
the company is in a competitive environment.
d.
significant barriers to entry exist.
e.
All of these are correct (that is, all of these are reasons a growth company may exist).
156. In a(n) ____ strategy, a firm seeks to identify itself as unique within its industry.
a.
defensive
b.
offensive
c.
low-cost
d.
differentiation
e.
leadership
157. In SWOT analysis, one examines all of the following factors, EXCEPT
a.
strengths.
b.
weaknesses.
c.
opportunities.
d.
threats.
e.
turnarounds.
158. Which of the following statements concerning SWOT analysis is FALSE?
a.
Strengths are the factors that give the firm a comparative advantage in the marketplace.
b.
Weaknesses result when the company has potentially exploitable advantages over other firms.
c.
Opportunities are environmental factors that favor the firm.
d.
Threats are environmental factors that can hinder the firm in achieving its goals.
e.
None of these are correct (that is, all statements are true).
159. Which of the following is NOT a technique for valuing a firm’s common stock?
a.
present value of free cash flow to equity
b.
present value of dividends
c.
price-earnings ratio
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
d.
price-book value ratios
e.
price-cost of goods sold ratio
160. Which of the following is NOT considered when looking at free cash flow to equity technique?
a.
depreciation expense
b.
change in working capital
c.
principal debt repayments
d.
change in competitive environment
e.
net income
161. Under 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
a.
weighted average cost of capital.
b.
cost of debt.
c.
internal rate of return.
d.
external cost of new equity.
e.
net present value.