Q&A Hero

Q: When the economy is in a recession, by definition, all sectors of the economy must be experiencing a downturn, or contraction. a. True b. False

Q: Economists define a recession as a contraction in the economy in at least three out of the last five quarters. a. True b. False

Q: Fundamental analysts attempt to find the intrinsic value of a firm by evaluating information contained in financial statements, industry reports, and economic forecasts. a. True b. False

Q: The economic activity in the United States generally is measured by the gross domestic product (GDP). a. True b. False

Q: A business cycle is the measure of all the goods and services produced in the economy during a specific time period. a. True b. False

Q: Technical analysis is the examination of the supply/demand relationships for securities to determine trends in price movements of stocks or financial markets. a. True b. False

Q: Technical analysts often are called chartists because they depend solely on charts and graphs to determine stock market trends. a. True b. False

Q: Fundamental analysis is used to try to find the intrinsic value of a firm, which actually is the "true", or economic, value. a. True b. False

Q: Fundamental analysts primarily base their investment decisions on analyses of supply and demand relationships that influence trends in price movements in stocks and general financial market conditions. a. True b. False

Q: Which of the following measures is included in the index of lagging indicators? a. Loans to commerce and industry b. Manufacturing and trade sales c. Index of consumer expectations d. Industrial production

Q: Which of the following measures is included in the index of coincident indicators? a. Average workweek production b. Prime rate at banks c. New private building permits d. Industrial production

Q: Many investors use screening techniques to find one of two kinds of stocks. One kind is stocks of firms that exhibit sales and earnings growth rates that significantly exceed the industry averages. Another kind is stocks of firms that are mispriced, especially those that are undervalued. What are these two types of stocks called? a. preferred stocks and common stocks b. growth stocks and value stocks c. advancing stocks and declining stocks d. efficient stocks and inefficient stocks

Q: Which of the following measures is included in the index of leading indicators? a. prime rate at banks b. average length of unemployment c. money supply d. manufacturing and trade sales

Q: According to the Dow Theory, which one of the following is not one of the types of market movements that are possible? a. A short-term movement. b. An intermediate trend. c. A broad trend. d. All of the above types of market movements are possible.

Q: The EVA of a firm will be positive when a. WACC > IRR b. WACC = IRR c. WACC < IRR d. IRR > 0

Q: Generally speaking, the P/E multiples are higher for firms with ____ expected growth rates and ____ expected required rates of return. a. higher; lower b. lower; higher c. lower; lower d. higher; higher

Q: Increased deficit spending by the government is likely to result in a. higher than normal interest rates. b. no change in the interest rate. c. lower than normal interest rates. d. lower expected inflation.

Q: When the Federal Reserve wants to slow down the economy that is growing at an unsustainable rate, the Federal reserve can a. decrease interest rates by increasing the money supply. b. increase interest rates by increasing the money supply. c. increase interest rates by decreasing the money supply. d. decrease interest rates by decreasing the money supply.

Q: The ____ includes all the goods and services produced in the economy during a specific time where value of the goods and services is adjusted for inflation. a. real GDP b. nominal GDP c. real GNP d. nominal GNP

Q: The ____ includes all the goods and services produced in the economy during a specific time where value of the goods and services is not adjusted for inflation. a. real GDP b. nominal GDP c. real GNP d. nominal GNP

Q: Acme Corporation stock currently sells for $22.08 per share. The last dividend paid was $1.00 per share. The next dividend will be paid in one year and is expected to be $1.50; the following year's dividend will be $2.50; and, in the third year dividends are expected to begin growing at a constant rate. If the appropriate discount rate for Acme is 20 percent, at what constant rate does the market expect dividends to grow in Year 3 and beyond? a. 10.0% b. 15.0% c. 8.0% d. 20.0% e. 12.5%

Q: Since its inception five years ago, Companioni Gyms has not paid a dividend to its common stockholders, and it does not expect to pay a dividend for the next five years. Beginning six years from today, however, Companioni Gyms expects to pay a $2 dividend, which, from that point on, will increase by 10 percent per year forever. Stocks with similar risks have a required rate of return equal to 15 percent. What should be the market price of Companioni's common stock? a. $19.89 b. $22.87 c. $17.29 d. $44.00 e. There is not enough information to answer this question.

Q: Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $4,500,000 Total Capital $6,000,000 Shares Outstanding 1,500,000 Marginal Tax Rate 60% Debt/Assets Ratio 50% Cost of Equity 24% Cost of Debt 15% a. $1.20 b. $0.90 c. $0.60 d. $0.36 e. $0.24

Q: Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $5,000,000 Total Capital $8,000,000 Shares Outstanding 2,000,000 Marginal Tax Rate 40% Debt/Assets Ratio 70% Cost of Equity 16% Cost of Debt 10% a. $1.07 b. $1.14 c. $1.20 d. $2.28 e. $2.40

Q: Ace Incorporated has just paid a dividend of $4.00 per share. They have a retention ratio of 20 percent. They have a P/E ratio of 14. What should be the current price of the stock? a. $56.00 b. $11.20 c. $70.00 d. $46.67 e. There is not enough information to answer this question.

Q: What is the expected price for the stock of a company that just paid a dividend of $3.00? The company has a dividend payout ratio of 50 percent, discount rate of 25 percent, and a P/E of 10. a. $60.00 b. $30.00 c. $12.00 d. $45.00 e. $22.50

Q: Candy Apple Cakes' stock has a current market value of $40.50. The company just paid a dividend equal to $1.50 per share, which is expected to grow at a constant rate forever into the future. If Candy Apple's marginal investors require a rate of return equal to 12 percent, what is the rate at which dividends are expected to grow in the future? a. 8.3% b. 12.0% c. 4.0% d. 8.0% e. There is not enough information to answer this question.

Q: Wheathouse Bakery just paid a dividend of $2.50. They expect the dividends to grow at 15 percent per year for next three years, and then they expect the dividends to remain constant forever. The appropriate discount rate for this firm is 20 percent. What should be the current market price of the stock? a. $15.69 b. $17.50 c. $17.89 d. $19.01 e. $22.16

Q: F Minus Notes is a publicly traded company. The last dividend paid was $4 per share. Dividends are paid annually, and they are expected to increase 5 percent per year for the next five years, then increase 10 percent per year thereafter. The discount rate associated with F Minus Notes common stock is 20 percent. What should be the current price of F Minus Notes stock? a. $36.21 b. $33.13 c. $47.55 d. $50.72 e. $59

Q: Davis Brothers Incorporated is an apparel manufacturer that paid a $1.50 dividend yesterday. Analysts expect dividends to grow at a constant 20 percent per year for the next four years. From that point forward, dividends are expected to grow at a constant rate of 12 percent forever. The discount rate for a firm of this risk is 15 percent. What should be the current stock price? a. $65.96 b. $58.23 c. $103.68 d. $73.07 e. $106.79

Q: Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $3,000,000 Total Capital $5,000,000 Shares Outstanding 1,250,000 Marginal Tax Rate 40% Debt/Assets Ratio 75% WACC 18% Cost of Debt 13% a. $1.15 b. $0.92 c. $0.90 d. $0.72 e. $0.24

Q: Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $6,000,000 Total Capital $8,000,000 Shares Outstanding 1,000,000 Marginal Tax Rate 35% Debt/Assets Ratio 60% WACC 20% Cost of Debt 10% a. $0.50 b. $0.70 c. $2.00 d. $2.30 e. $3.10

Q: Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $ 7,000,000 Total Capital $12,000,000 Shares Outstanding 2,000,000 Marginal Tax Rate 30% Debt/Assets Ratio 50% WACC 15% Cost of Debt 11% a. $0.15 b. $0.85 c. $1.55 d. $1.79 e. $2.60

Q: Using the following financial data, determine the maximum total dividends that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $3,000,000 Total Capital $7,000,000 Shares Outstanding 1,000,000 Marginal Tax Rate 40% Debt/Assets Ratio 30% WACC 14% Cost of Debt 9% a. $1,170,000 b. $1,120,000 c. $820,000 d. $570,000 e. $220,000

Q: Use the following financial data to determine the maximum total dividends that can be paid to stockholders before the firm's value would be threatened. Base your answer on the economic value added model. EBIT $5,000,000 Total Capital $9,000,000 Shares Outstanding 1,000,000 Marginal Tax Rate 40% Debt/Assets Ratio 60% WACC 12% Cost of Debt 10% a. $920,000 b. $1,920,000 c. $2,100,000 d. $2,352,000 e. $3,920,000

Q: If the industry P/E ratio normally varies from 15 to 20, which of the following prices is most appropriate for a company that has an EPS equal to $3? a. $57.60 b. $40.00 c. $188.20 d. $43.20 e. Not enough information is given to answer this question.

Q: Big Joe's Burgers has a P/E ratio of 12 and a beta equal to 3. The risk-free rate is 8 percent and the return to the market has been 14 percent. The firm has an EPS of $5.00. What should be the current market price of Big Joe's stock? a. $120.00 b. $96.00 c. $44.40 d. $60.00 e. $55.20

Q: Pet Rock Quarries, Inc. is a publicly traded company with 200,000 shares of common stock outstanding. The stock currently sells for $50.00 a share. They had net income of $4,000,000. What is the company's P/E ratio? a. 20.0 b. 50.0 c. 2.5 d. 2.0 e. There is not enough information to answer this question.

Q: MTB Surfboards has a P/E of 20. The discount rate for this firm is 30 percent. They had earnings of $2,000,000 and 100,000 shares of common stock outstanding. What should be the current price of the stock? a. $120.00 b. $60.00 c. $600.00 d. $400.00 e. $200.00

Q: What is the expected stock price of company who has $5.00 earnings per share, a dividend payout ratio of 0.8, and a P/E ratio of 12? a. $48.00 b. $60.00 c. $12.00 d. $9.60 e. There is not enough information to answer this question.

Q: Beefcake Burgers' stock has a current market value of $80.65. The company just paid a dividend equal to $3.50 per share, which is expected to grow at a constant rate of 6 percent forever into the future. What is the rate of return required by Beefcake's marginal investors? a. 10.3% b. 6.0% c. 10.6% d. 15.0% e. There is not enough information to answer this question.

Q: Ace Fly Rod Company expects the next dividend it pays, which will be in one year, to be $3. In the following year, the dividend is expected to be $4.50, and then the dividends are expected to grow at 10 percent annually thereafter. The appropriate discount rate for the company is 18 percent. What should be the market price of the stock? a. $59.68 b. $57.58 c. $50.21 d. $46.17 e. $43.43

Q: Hurricane Shutters Inc. paid a dividend of $1.30 yesterday. The next dividend will be in one year and is expected to be $1.50. After that, dividends are expected to grow at a constant 15 percent forever. The discount rate for Hurricane Shutters Inc. is 25 percent. What should be the market price of the stock? a. $25 b. $15.00 c. $13.20 d. $13.80 e. $18.75

Q: Florida Sports Magazine is a publicly traded company. The next dividend will be paid in one year and is expected to be $1.25 per share. Dividends are expected to grow at 10 percent a year for the next three years, and then grow at 8 percent a year thereafter. The appropriate discount rate for investing in this firm is 15 percent. What should be the current stock price? a. $21.27 b. $10.76 c. $22.40 d. $17.33 e. $18.75

Q: Titanium World Inc., which is a firm that makes specialized golf clubs, plans to pay a dividend of $2 per share at the end of this year; the following year's dividend is expected to be $3 per share; the dividend the year after is expected to be $5; and, after that point, dividends should increase at a constant rate of 10 percent each year forever. The appropriate discount rate for Titanium World is 15 percent. What is the per share value of Titanium World's stock? a. $70.19 b. $110.00 c. $62.89 d. $79.62 e. $80.72

Q: Technical analysts would argue that the stock market is ____ form efficient. a. Weak b. Semistrong c. Strong d. None of the above, because most technicians would argue the stock market is not efficient.

Q: Which of the following statements is correct? a. A stock is said to be in equilibrium when investors at the margin think its expected rate of return is equal to its required rate of return. b. According to the Efficient Markets Hypothesis, stock prices are best predicted by use of sophisticated statistical techniques such as regression analysis. c. The more efficient markets are, in an EMH sense, the easier it is for sophisticated investors to profit by analyzing data that companies have released to the public. d. The more efficient markets are, in an EMH sense, the more dangerous it would be for an investor to pick stocks at random as opposed to picking them on the basis of a careful analysis. e. The EMH would predict that one can "beat the market" by analyzing publicly available data, if the analyst is efficient.

Q: Price/earnings ratios are ____ for firms with ____ expected earnings and ____ expected required rates of return. a. higher; higher; higher b. lower; lower; lower c. higher; lower; higher d. higher; higher; lower e. higher; lower; lower

Q: If the stock market is semi-strong efficient, which of the following statements is correct? a. All stocks should have the same expected returns; however, they may have different realized returns. b. In equilibrium, stocks and bonds should have the same expected returns. c. Investors can outperform the market if they have access to information which has not yet been publicly revealed. d. If the stock market has been performing strongly over the past several months, stock prices are more likely to decline than increase over the next several months. e. None of the above statements is correct.

Q: Financial statement analysis should be included in investment analysis because a. A firm's business conditions can be compared with similar firms to determine whether its current operations are average or above or below average. b. We can predict earnings and dividends by forecasting the future financial conditions. c. We can use the accounting statements and information regarding current and forecasted business conditions to form expectations regarding the risk of the firm's future operations. d. Only a and b are valid reasons. e. a, b and c are all valid reasons.

Q: All of the following variables must be estimated when using the dividend discount model for stock valuation except the a. Future dividends. b. Growth rate of the company. c. Risk free rate. d. Appropriate required rate of return.

Q: What are the stages of a typical industry life cycle? a. Introductory stage, expansionary or contractionary stage (depending on the business cycle), mature stage. b. Speculative, expanding growth, declining growth. c. If the industry is cyclical then it will not follow a life cycle because it expands and contracts with the business cycle. d. Introductory stage, Expansion stage, Mature stage. e. Introductory stage, Expansion stage, Stable stage.

Q: Industries that tend to be directly related to business cycles such that they perform best during expansions and worst during contractions are called ____. a. Defensive industries b. Industry life cycles c. Countercyclical industries d. Growth industries e. Cyclical industries

Q: Which of the following economic indicators is not considered a leading indicator? a. Average workweek, production. b. Average length of unemployment. c. Money supply, M2. d. New orders of manufacturers. e. Stock prices.

Q: ____ occurs when the government spends more than it collects in taxes. a. Deficit spending b. Fiscal policy c. Monetary policy d. Gross domestic product e. Business cycle

Q: Government spending, which is primarily supported by the government's ability to tax individuals and businesses, is called ____. a. Deficit spending b. Fiscal policy c. Monetary policy d. Gross domestic product e. Business cycle

Q: The means by which the Federal Reserve influences economic conditions in the United States is called ____. a. Deficit spending b. Fiscal policy c. Monetary policy d. Gross domestic product e. Business cycle

Q: Factors that fundamentalists examine to determine future stock price movements include: I. Company conditions II. Industry conditions III. Economic & market conditions IV. Supply/demand relationships a. I, II, and IV b. I and II c. II and III d. I, II, and III e. II, III, and IV

Q: The practice of evaluating the information contained in financial statements, industry reports, and economic factors to determine the intrinsic value of a firm is called a. Asset valuation. b. Technical analysis. c. Price theory. d. Fundamental analysis. e. Industry analysis.

Q: A recession occurs when the economy contracts by at least two percent in a quarter. a. True b. False

Q: Technical analysis is used to determine when the economy is going to expand or contract in the future. a. True b. False

Q: Fundamental analysis attempts to determine the intrinsic value of stock by analyzing company conditions, industry conditions, and economic conditions. a. True b. False

Q: The consensus advice from successful professional investors is that individuals should "buy and hold" their investments until either personal goals or market conditions change. a. True b. False

Q: The Dow Theory states that as long as the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction, the market will reverse its current trend. a. True b. False

Q: The Dow Theory states that as long as the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction, the market will continue its current trend. a. True b. False

Q: To determine the appropriate P/E multiple for an individual firm simply take the average P/E multiple for the firm's industry and multiply it by the beta for the individual firm. a. True b. False

Q: The easiest input to successful ratio analysis is the judgment used when interpreting the results to reach an overall conclusion about the firm's financial position. a. True b. False

Q: In general, financial statement analysis involves a comparison of a firm's operating performance and financial position with that of other firms in the same line of business and can be used to form expectations about the firm's future cash flow distributions. a. True b. False

Q: Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms. a. True b. False

Q: The value of any asset can be described as the present value of the cash expected to be generated by the asset during its life. a. True b. False

Q: If the financial markets are strong-form efficient, then stock analysis would be a waste of time because investors would not be able to earn abnormal returns, no matter how well the valuation models they use perform. a. True b. False

Q: Investment professionals probably would recommend that an investor who likes to gamble should have a portfolio that includes only speculative securities such as options and futures, interest-rate swaps, and so forth. a. True b. False

Q: Methods (models) used by technical analysts are designed to identify short-term, temporary market movements that investors can use to earn abnormal returns. a. True b. False

Q: Asset allocation refers to the proportion of funds invested in various categories of assets. a. True b. False

Q: An individual's risk tolerance level depends on existing economic conditions. For example, when the economy is doing well an individual is more likely to have lower risk tolerance level. a. True b. False

Q: Because an investor borrowing funds for margin trading pays a fixed rate to borrow funds from his broker, the margin trading returns are magnifies the returns on the assets value. a. True b. False

Q: Because the simple arithmetic return does not consider compounding, its value will always be less than the geometric average return, unless the annual rates of return are constant. a. True b. False

Q: The simple arithmetic average return and the geometric average return will be equal only if the annual returns are increasing over time. a. True b. False

Q: To trade securities an individual must be licensed by the exchanges on which the traded securities are listed. a. True b. False

Q: The degree of risk adversity exhibited by investors varies among individuals at any point in time and changes for individuals across time. a. True b. False