Q&A Hero

Q: Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to _____. A. $175 million B. $155 million C. $120 million D. $55 million

Q: Depreciation expense is in what broad category of expenditures? A. Operating expenses B. General and administrative expenses C. Debt interest expense D. Tax expenditures

Q: Many observers believe that firms "manage" their income statements to _______. A. minimize taxes over time B. maximize expenditures C. smooth their earnings over time D. generate level sales

Q: Cost of goods sold refers to ___________. A. direct costs attributable to producing the product sold by the firm B. salaries, advertising, and selling expenses C. payments to the firm's creditors D. payments to federal and local governments

Q: Which of the following assets is most liquid? A. Cash equivalents B. Receivables C. Inventories D. Plant and equipment

Q: Which of the following valuation measures is often used to compare firms that have no earnings? A. Price-to-book ratio B. P/E ratio C. Price-to-cash-flow ratio D. Price-to-sales ratio

Q: The greatest value to an analyst from calculating a stock's intrinsic value is _______. A. how easy it is to come up with accurate model inputs B. the precision of the value estimate C. how the process forces analysts to understand the critical variables that have the greatest impact on value D. how all the different models typically yield identical value results

Q: Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______. A. the terminal value used B. whether one uses FCFF or FCFE C. the time period used to estimate the cash flows D. whether the firm is currently paying dividends

Q: In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price? A. Import/export trade B. Software C. Telecommunications D. Utility

Q: A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment? A. 27 years B. 37 years C. 55 years D. 75 years

Q: When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO? A. 92% B. 87% C. 77% D. 64%

Q: Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? A. $6 B. $24.50 C. $44.44 D. $75

Q: Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A. $9.09 B. $10.10 C. $11.11 D. $12.21

Q: A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? A. $27.27 B. $37.50 C. $66.67 D. $70

Q: Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B. A. I only B. I and II only C. II and III only D. I, II, and III

Q: The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A. $1,950 billion B. $2,497 billion C. $2,585 billion D. $3,098 billion

Q: The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A. $2,168 billion B. $2,445 billion C. $2,565 billion D. $2,998 billion

Q: The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm? A. $269 million B. $296 million C. $305 million D. $327 million

Q: The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm? A. $405.6 million B. $454.2 million C. $505.8 million D. $553.5 million

Q: If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A. $679.81 million B. $715.54 million C. $769.23 million D. $803.03 million

Q: The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? A. $1 billion B. $2 billion C. $3 billion D. $4 billion

Q: A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A. $57 B. $65 C. $75 D. $95

Q: The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm? A. $85 B. $125 C. $185 D. $305

Q: Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after-tax profit? A. 300,000 B. 400,000 C. 500,000 D. 600,000

Q: The fed funds rate is the __________. A. interest rate that banks charge their best corporate customers B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed C. interest rate the Fed charges commercial banks on short-term loans D. interest rate that the U.S. Treasury pays on its bills

Q: Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________. A. $90,000 B. $210,000 C. $300,000 D. $630,000

Q: Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________. A. $0 B. $90,000 C. $180,000 D. $270,000

Q: An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________. A. sector rotation B. contraction/expansion analysis C. life-cycle analysis D. business-cycle shifting

Q: Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: I. Maturity II. Relative decline III. Consolidation A. III, I, II B. I, III, II C. III, II, I D. I, II, III

Q: The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________. A. -6% B. 4% C. 5.77% D. 14.4%

Q: The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________. A. 2.91% B. 3.85% C. 1.45% D. 2.12%

Q: Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: If the currency of your country is depreciating, this should __________ exports and __________ imports. A. stimulate; stimulate B. stimulate; discourage C. discourage; stimulate D. discourage; discourage

Q: The discount rate is the ________. A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed B. interest rate the Fed charges commercial banks on short-term loans C. interest rate that the U.S. Treasury pays on its bills D. interest rate that banks charge their best corporate customers

Q: Assume that the Federal Reserve increases the money supply. This will cause: I. Interest rates to decrease II. Consumption and investment to decrease III. Inflation to fall A. I only B. I and II only C. II and III only D. I, II, and III

Q: An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A. bottom-up B. outside-inside C. top-down D. upside-down

Q: Which of the following is the rate at which the general level of prices for goods and services is rising? A. The exchange rate B. The gross domestic product growth rate C. The inflation rate D. The real interest rate

Q: Which of the following describes the percentage of the total labor force that has yet to find work? A. The capacity utilization rate B. The participation rate C. The unemployment rate D. The natural rate

Q: A firm in the early stages of its industry life cycle will likely have _________. A. low dividend payout rates B. low rates of investment C. low rates of return on investment D. low R&D spending

Q: Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms. A. the Senate; 10-year B. the House of Representatives; 8-year C. the President; 14-year D. the Secretary of the Treasury; 6-year

Q: If the economy is going into a recession, a good industry to invest in would be the __________ industry. A. automobile B. banking C. construction D. medical services

Q: If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________. A. you have more information than others B. you are a better analyst than others C. you have the same information as others D. you are an equally good analyst as others

Q: Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the _____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

Q: Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

Q: Which one of the following is not a U.S. supply shock? A. Unions force an increase in national wage rates. B. The oil supply from the Middle East drops 30%. C. Extended droughts reduce U.S. food production 25%. D. Chinese purchases of U.S. exports increase.

Q: Which one of the following is not a demand shock? A. Increase in government spending B. Increases in the money supply C. Reductions in consumer spending D. Improvements in education of U.S. workers

Q: The stock price index and contracts and orders for nondefense capital goods are _________. A. leading economic indicators B. coincidental economic indicators C. lagging economic indicators D. leading and coincidental indicators, respectively

Q: An example of a highly cyclical industry is the _________. A. automobile industry B. tobacco industry C. pharmaceutical industry D. utility industry

Q: Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? A. The nominal exchange rate B. The nominal interest rate C. The real exchange rate D. The real interest rate

Q: Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product A. II only B. I and II only C. I and III only D. I, II, and III

Q: Everything else equal, an increase in the government budget deficit would: I. Increase the government's demand for funds II. Shift the demand curve for funds to the left III. Increase the interest rate in the economy A. II only B. I and II only C. I and III only D. I, II, and III

Q: The ratio of the purchasing power of two economies is termed the _______. A. balance of trade B. real exchange rate C. real interest rate D. nominal exchange rate

Q: The average duration of unemployment is _________. A. a leading economic indicator B. a coincidental economic indicator C. a lagging economic indicator D. both a coincidental indicator and a lagging indicator

Q: ______________ in interest rates are associated with stock market declines. A. Anticipated increases B. Unanticipated increases C. Anticipated decreases D. Unanticipated decreases

Q: In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________. A. demand shock B. supply shock C. monetary shock D. refinery shock

Q: Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance? A. Fiscal policy B. Monetary policy C. Supply-side policy D. Rising minimum wages

Q: Which one of the following describes the amount by which government spending exceeds government revenues? A. Balance of trade B. Budget deficit C. Gross domestic product D. Output gap

Q: Supply-side economics tends to focus on _______________. A. government spending B. price controls C. monetary policy D. increasing productive capacity

Q: Which of the following is not an example of fiscal policy? A. Social Security spending B. Medicare spending C. Fed purchases of Treasury securities D. Changes in the tax rate

Q: If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. A. below-average B. average C. above-average D. Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

Q: Which of the following would not be considered a supply shock? A. A change in the price of imported oil B. Frost damage to the orange crop C. A change in the level of education of the average worker D. An increase in the level of government spending

Q: To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate. A. add; default premium to B. subtract; default premium from C. add; expected inflation to D. subtract; expected inflation from

Q: Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________. A. buy long-term bonds B. buy short-term bonds C. buy common stocks D. buy preferred stocks

Q: Inflation is caused by ________________. A. unions B. rapid growth of the money supply C. excess supply D. low rates of capacity utilization

Q: Which of the following companies is the best example of a turnaround? A. Coca-Cola B. Microsoft C. ExxonMobil D. Kmart

Q: The analysis of the determinants of firm value is called _____________. A. fundamental analysis B. technical analysis C. momentum analysis D. indexing

Q: Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A. Technical analysis B. Fundamental analysis C. Both technical analysis and fundamental analysis D. Indexing

Q: Portfolio manager Peter Lynch would classify Coca-Cola as _________. A. an asset play B. a slow grower C. a stalwart D. a turnaround

Q: GDP refers to _________. A. the amount of personal disposable income in the economy B. the difference between government spending and government revenues C. the total manufacturing output in the economy D. the total production of goods and services in the economy

Q: A big increase in government spending is an example of a _________. A. positive demand shock B. positive supply shock C. negative demand shock D. negative supply shock

Q: The market value of all goods and services produced during a given time period is called ______. A. GDP B. industrial production C. capacity utilization D. factory orders

Q: According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work. A. Keynesian B. monetarist C. supply-side D. demand-side

Q: Which one of the following is the ratio of actual output from factories to potential output from factories? A. Capacity utilizationrate B. Participation rate C. Durable goods orders rate D. Industrial production rate

Q: The most widely used monetary policy tool is _________. A. altering the discount rate B. altering reserve requirements C. open market operations D. increasing the budget deficit

Q: Which one of the following stocks represents industries with below-average sensitivity to the state of the economy? A. Financials B. Technology C. Food and beverage D. Cyclicals

Q: Which of the following industries would most analysts classify as mature? A. Internet service providers B. Biotechnology C. Wireless communication D. Auto manufacturing

Q: You can earn abnormal returns on your investments via macro forecasting ______. A. if you can forecast the economy at all B. if you can forecast the economy as well as the average forecaster C. if you can forecast the economy better than the average forecaster D. only if you can forecast the economy with perfect accuracy

Q: The Conference Board's Consumer Confidence Index is released ______. A. daily B. weekly C. monthly D. quarterly

Q: The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator. A. leading B. lagging C. coincident D. mixed