Business Development

Q: The strong inverse relationship between P/E ratios and changes in the Consumer Price Index can be directly traced to investors' required rate of return.

Q: The appropriate price-earnings ratio (P/E ratio) to be used for stock valuation can be calculated at any time by dividing the current stock price by the last twelve months of earnings per share.

Q: The final value calculated in dividend valuation models is typically very accurate.

Q: Under most dividend valuation models, a stock with an expected level dividend (zero dividend growth) would have no value.

Q: When the constant dividend growth model formula is appropriate, it is possible for a negative stock value to result.

Q: All dividend valuation models are based on the present value of a future income stream.

Q: Stock dividends are used to signal to investors that a company is making profit.

Q: Due to intense needs for capital to fund growth, Stage I companies rarely pay cash dividends.

Q: A frequent source of capital for profitable Stage I companies is venture capitalists.

Q: Firms in the development stage finance their growth from internal cash flows.

Q: Firms in the development stage are typically publicly owned.

Q: The more saturated an industry gets with competitors, the further along the life cycle it will probably be.

Q: The life cycle curve in Chapter 6 is graphed so that the steeper the slope of the line, the faster the growth rate of the industry.

Q: Industry life cycles predict an industry's sensitivity to the economy.

Q: Industry life cycles measure the growth path of an industry through five stages.

Q: The last step to the top-down approach is to analyze the overall health of the economy.

Q: Investors who follow the bottom-up approach to stock valuation are referred to as industry-analysts.

Q: The method that starts the stock valuation process with an economic analysis is called the top-down approach.

Q: The method of starting the stock valuation process with an analysis of the economy is referred to as the bottom-up approach.

Q: The first step in the top-down approach to stock valuation is analyzing the position of the industry in its life cycle.

Q: When companies reach the crossover point, A.they have filed for an initial public offering (IPO). B.their stock prices increase, because their earnings are now more predictable. C.their stock prices plummet, because price-earnings ratios collapse because of lower growth expectations. D.sales expansion and earnings begin to rise at an increasing rate. E.sales grow at a rate equal to the economy, as measured by the long-term trend in gross domestic product (GDP).

Q: Which of the following statements is false? A.Industry life cycles measure the growth path of an industry through 5 stages B.Industry life cycles predict an industry's sensitivity to the economy C.The industry life cycle curve is graphed so that, the steeper the slope of the line, the faster the growth rate of the industry D.The particular phase of the life cycle of an industry determines the growth of earnings, dividends, capital expenditures, and market demand for products E.The five stages of the industry life cycle are development, growth, expansion, maturity, and decline

Q: Patents are important to the pharmaceutical industry because they: A.protect companies from low-cost generic drugs. B.keep other drug companies from developing competitive drugs for the same disease. C.allow the companies to earn a high enough rate of return in the early years of a drug to continue research and development efforts on new drugs. D.A and C

Q: One of the strongest predictable events for the future growth of pharmaceutical companies is the: A.aging world population. B.development of new drugs through research and development. C.low cost of generic drug alternatives. D.more stringent testing and approval of drugs by government agencies.

Q: Michael Porter divides competitive structure into five basic competitive forces. Which one of the following does not belong? A.Threat of entry by new competitors B.Bargaining power of the buyers C.Bargaining power of the sellers D.The relative profit margins between competitors E.Rivalry among existing competitors

Q: Which of the following characteristics is not usually found in industries that are oligopolies? A.Barriers to entry B.Intense competition between competitors C.Increasing foreign competition D.No differentiation between products

Q: Why do industries usually enter the decline stage? A.Product innovation has not increased the product base over the years B.Low dividend payout ratios have kept spending in research and development down C.Economic recessions have lowered sales D.Competition from foreign producers has limited profits

Q: Growth rates are highest in which of the industry life cycle stages? A.Expansion B.Growth C.Development D.Maturity

Q: One way some U.S. companies have increased sales growth is by: A.expanding into markets overseas. B.increasing dividend payout ratios. C.decreasing dividend payout ratios. D.lowering prices.

Q: Which of the following industries is a good example of an industry in the maturity stage? A.The pharmaceutical industry B.The automobile industry C.The biotechnology industry D.The health care industry

Q: Industries in the maturity stage will have growth rates comparable to which of the following? A.Equal to the long-term trend in the gross domestic product (GDP) B.Double the long-term trend in GDP C.Less than the long-term trend in GDP D.The growth rate of the consumer price index (CPI)

Q: Determining the crossover point on the life cycle curve is important for which reason? A.Stock prices usually climb as earnings become more stable B.Price-earnings ratios collapse because of slower growth expectations C.Increasing cash dividends will lead to higher share prices D.Investors who choose to invest in growth companies will want to wait until the crossover point has been reached E.None of the above

Q: An investor will purchase shares of companies in the development stage for: A.current income only. B.current income and capital gains. C.capital gains only. D.passive losses to offset other income.

Q: The crossover point on the life cycle curve is the point where: A.the company issues stock in an initial public offering (IPO). B.the company gets listed on an organized exchange. C.the company's industry moves from the growth stage to the expansion stage. D.the industry's products begin to be accepted by the marketplace. E.the company goes into decline, and can no longer compete within the industry.

Q: The use of stock dividends by industries in the growth stage is for what purpose? A.To dilute the ownership of current holders of equity B.To maintain cash to pay off creditors C.To signal to investors that the company is profitable D.Because cash dividends would signal to investors that the company has reached the crossover point

Q: Which of the following sources of capital is not likely to be used by companies in the development stage? A.Family loans B.Bank loans C.Venture capital D.Corporate bonds

Q: Which of the following factors would not affect an industry's life cycle? A.Economic growth B.Availability of resources C.Competition D.Expansion into global markets

Q: In which stage in the industry life cycle are companies likely to be privately owned? A.Development B.Maturity C.Decline D.Expansion

Q: Which investing approach do stock pickers favor? A.Top-down approach B.Bottom-up approach C.Industry analysis D.Rotational investing

Q: Which of the following is the most significant positive factor in the future profitability of the pharmaceutical industry? A.Research and development of new drugs B.Government regulation C.Generic drugs D.Patents

Q: Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry? A.Government regulation B.Demographic trends C.Generic drugs D.Use of too much debt in their capital structure

Q: The pharmaceutical industry has submitted up to 2,900 drugs per year to the U.S. Food and Drug Administration between 1995 and 2009, and the approval rate is close to: A.3.3%. B.8.2%. C.10%. D.22.2%.

Q: Which of the following industry sectors would an investor want to purchase at the trough of the business cycle? A.Basic materials B.Consumer non-cyclical goods C.Consumer cyclical goods D.Household durable goods

Q: Why would an investor want to use the rotational investing method? A.It allows the investor to rotate out of losing stocks B.The investor is attempting to profit from movements in the economic cycle C.It is an easy method of employing dollar-cost averaging D.It assures the investor of owning the proper mix of stocks and bonds E.It is easy to time the market for higher returns

Q: When using the top-down approach to company valuation, which is the proper order for an analyst to use? A.Macro-economic environment, company analysis, industry analysis B.Company analysis, industry analysis, macro-economic environment C.Macro-economic environment, industry analysis, company analysis D.Industry analysis, company analysis, macro-economic environment E.Company analysis, macro-economic environment, industry analysis

Q: Which of the following economic structures of industries was not specifically mentioned in this chapter? A.Monopoly B.Pure competition C.Semi-strong competition D.Oligopolies

Q: Which of the following competitive forces is not one of the five mentioned in this chapter? A.Threat of market entry by new competitors B.Threat of substitute goods C.Bargaining power of customers D.Intensity of rivalry among competitors

Q: Which of the following is the proper order of the industry life cycle? A.Development, growth, expansion, maturity, decline B.Expansion, growth, development, maturity, decline C.Development, expansion, growth, maturity, decline D.Expansion, development, growth, maturity, decline E.Growth, development, expansion, maturity, decline

Q: Which of the following stages does not belong in the industry life cycle? A.Growth B.Stagnation C.Decline D.Maturity E.Expansion

Q: Which of the four following industries was not mentioned as an example of a consumer non-cyclical industry? A.Utility companies B.Food stocks C.Pharmaceuticals D.Tobacco stocks

Q: Which of the following four industry sectors would benefit the most from rising inflation? A.Consumer cyclical goods B.Basic materials C.Household durable goods D.Consumer non-cyclical goods

Q: A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)? A.Basic materials; consumer cyclical; consumer non-cyclical; household durable goods B.Consumer cyclical; basic materials; consumer non-cyclical; household durable goods C.Basic materials; household durable goods; consumer cyclical; consumer non-cyclical D.Household durable goods; consumer cyclical; consumer non-cyclical; basic materials E.Household durable goods; basic materials; consumer non-cyclical; consumer cyclical

Q: When analyzing the structure of an industry, which of the following factors is particular to the company only? A.Government regulations B.Barriers to entry C.Product quality D.All of the above affect industry structure

Q: The pharmaceutical industry has to be concerned about the competition from generic versions of their drugs during the first 5 years after the release of a new drug. FALSE Drugs that receive patent protection from the U.S. Patent Office are protected from competition during their first 5 years.

Q: The pharmaceutical industry is dominated by international companies.

Q: A technically innovative firm in a mature industry may provide better growth opportunities than a high-growth industry.

Q: It is almost always unwise to invest in an industry which is entering Stage III of the industry life cycle.

Q: Growth firms generally pay higher cash dividends than mature firms.

Q: A Stage II industry is one that is growing, and thus provides opportunities without much risk.

Q: Mature industries are not likely to be sensitive to short-term swings in the business cycle.

Q: In the final stages of the business cycle, rotational investors will purchase basic materials and energy stocks.

Q: Investors usually anticipate movements in the economy before they actually happen.

Q: Investors should buy consumer non-cyclical stocks in the early stages of recovery.

Q: Different industries react similarly to changes in the business cycle.

Q: Rotational investors study the business cycle, and invest in companies that are likely to benefit from the predicted movements of the economy.

Q: Rotational investing is defined as the process by which investors rotate out of losing stocks and into new stocks.

Q: Companies with consistently high returns on equity usually are highly leveraged to take advantage of the large profit margins.

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