Q&A Hero

Q: You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A ________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

Q: Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A ________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

Q: You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A ________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

Q: The constant-growth dividend discount model (DDM) can be used only when the ________. A) growth rate is less than or equal to the required return B) growth rate is greater than or equal to the required return C) growth rate is less than the required return D) growth rate is greater than the required return

Q: Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ________. A) 0% B) 100% C) between 0% and 50% D) between 50% and 100%

Q: An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM). A) less than B) equal to C) greater than D) greater than or equal to

Q: ________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's q

Q: A firm cuts its dividend payout ratio. As a result, you know that the firm's ________. A) return on assets will increase B) earnings retention ratio will increase C) earnings growth rate will fall D) stock price will fall

Q: A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change. A) I only B) I and II only C) II and III only D) I, II, and III

Q: Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? A) Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. B) Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. C) Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. D) All three should be willing to pay the same amount for the stock regardless of their holding period.

Q: A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. A) has a Tobin's q value < 1 B) will generate a positive alpha C) has an expected return less than its required return D) has a beta > 1

Q: If a stock is correctly priced, then you know that ________. A) the dividend payout ratio is optimal B) the stock's required return is equal to the growth rate in earnings and dividends C) the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return D) the present value of growth opportunities is equal to the value of assets in place

Q: A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________. A) 1.83 B) 1.5 C) 1.35 D) 1.46

Q: Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? A) book value per share B) liquidation value per share C) market value per share D) Tobin's q

Q: Which one of the following is a common term for the market consensus value of the required return on a stock? A) dividend payout ratio B) intrinsic value C) market capitalization rate D) plowback ratio

Q: Earnings yields tend to ________ when Treasury yields fall. A) fall B) rise C) remain unchanged D) fluctuate wildly

Q: Which one of the following statements about market and book value is correct? A) All firms sell at a market-to-book ratio above 1. B) All firms sell at a market-to-book ratio greater than or equal to 1. C) All firms sell at a market-to-book ratio below 1. D) Most firms have a market-to-book ratio above 1, but not all.

Q: P/E ratios tend to be ________ when inflation is ________. A) higher; higher B) lower; lower C) higher; lower D) they are unrelated

Q: New-economy companies generally have higher ________ than old-economy companies. A) book value per share B) P/E multiples C) profits D) asset values

Q: The value of Internet companies is based primarily on ________. A) current profits B) Tobin's q C) growth opportunities D) replacement cost

Q: If a firm increases its plowback ratio, this will probably result in ________ P/E ratio. A) a higher B) a lower C) an unchanged D) The answer cannot be determined from the information given.

Q: The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle? A) start-up phase B) consolidation C) maturity D) relative decline

Q: The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. A) book value B) market value C) liquidation value D) Tobin's q

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) Chrysler

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 final 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: 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

Q: If you believe the economy is about to go into a recession, you might change your asset allocation by selling ________ and buying ________. A) growth stocks; long-term bonds B) long-term bonds; growth stocks C) defensive stocks; growth stocks D) defensive stocks; long-term bonds

Q: You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ________. A) a stalwart B) slow growth C) a star D) an asset play

Q: An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either ________ on its U.S. sales. A) lose market share or reduce its profit margin B) gain market share or reduce its profit margin C) lose market share or increase its profit margin D) gain market share or increase its profit margin

Q: In 1980 the dollar-yen exchange rate was about $.0045. In 2017 the yen-dollar exchange rate was about 91 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately ________ to maintain the same yen price in 2017. A) 144% B) 79.5% C) 265.4% D) 36%

Q: A top-down analysis of a firm's prospects starts with an analysis of the ________. A) firm's position in its industry B) U.S. economy or even the global economy C) industry D) specific firm under consideration

Q: Which industry would you expect to find the highest dividend payout yields? A) biotech B) technology C) electric utility D) business software

Q: Which industry had the highest stock price performance in 2017 according to the text? A) biotech B) electric utilities C) computer systems D) airlines

Q: Which industry had the highest ROE in 2016 according to the text? A) electric utilities B) business software C) aerospace D) money center banks

Q: Stock prices are ________ measures of firm value. A) backward-looking B) forward-looking C) coincident D) lagging

Q: Stock prices tend to ________ when corporate earnings ________. A) rise; rise B) rise; fall C) fall; rise D) none of the options

Q: Which of the following are barriers to entry? I. Large economies of scale required to be profitable II. Established brand loyalty III. Patent protection for the firm's product IV. Rapid industry growth A) I and II only B) I, II, and III only C) II, III, and IV only D) III and IV only

Q: Large-growth companies generally emerge in the ________ stage. A) start-up B) consolidation C) maturity D) relative decline

Q: Stalwarts are typically found in the ________ stage of the industry life cycle. A) start-up B) consolidation C) maturity D) relative decline

Q: At what point in the industry life cycle are inefficiencies in competitors most likely to be removed? A) start-up stage B) consolidation stage C) maturity stage D) relative decline stage

Q: Cash cows are typically found in the ________ stage of the industry life cycle. A) start-up B) consolidation C) maturity D) relative decline

Q: Items that are ________ and product purchases for which ________ is not important tend to be less cyclical in nature. A) necessities; income B) luxuries; leverage C) discretionary goods; time of purchase D) produced with high fixed costs; entertainment

Q: Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ________. A) demand shock B) equilibrium event C) expanding commodity event D) supply shock

Q: During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? A) demand shock B) equilibrium event C) expanding commodity event D) supply shock

Q: The classification system used to classify firms into industries is now called the ________ code. A) SIC B) NAICS C) ISO 57 D) ISM

Q: The supply of funds in the economy is controlled primarily by ________. A) the Federal Reserve System B) Congress C) money center banks D) the Treasury department

Q: The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ________. A) expanding economy B) increased inflation C) interest rate declines D) lower GDP

Q: An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ________. A) asset allocation B) capacity utilization C) employment management D) strategic planning

Q: An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A) an economic slowdown is likely B) employment trends will reverse and unemployment will occur C) government deficits will result from capacity utilization D) inflation may result from upward wage pressures

Q: The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect? A) higher interest rates due to the new government borrowing B) inflation resulting from more government purchases C) a negative supply shock D) shortage of investment due to new accounts

Q: What economic variable is most closely associated with increasing corporate profits? A) exchange rates B) inflation C) gross domestic product D) budget deficits

Q: You would expect the beta of cyclical industries to be ________ and the beta of defensive industries to be ________. A) greater than 1; less than 1 B) less than 1; less than 1 C) less than 1; greater than 1 D) greater than 1; greater than 1

Q: Which of the following are examples of cyclical industries? I. Washing Machines II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer A) I and II only B) I, II, and III only C) II, III, and IV only D) I, II, III, and IV

Q: The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A) U.S. goods will increase in cost, and Japan will import more. B) U.S. goods will increase in cost, and Japan will import less. C) U.S. goods will decrease in cost, and Japan will import more. D) U.S. goods will increase in cost, and Japan will export less.

Q: Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? A) Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. B) Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. C) Decrease the discount rate, lowering interest rates and causing both costs and prices to fall. D) Increase taxes, reducing costs and causing prices to fall.

Q: A supply-side economist would likely agree with which of the following statements? A) Real output and aggregate employment are primarily determined by aggregate demand. B) Real income will rise when government expenditures and tax rates increase. C) Real output and aggregate employment are primarily determined by tax rates. D) Increasing the money supply will increase real output without causing higher inflation.

Q: Countercyclical fiscal policy is best described by which of the following statements? A) Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B) The annual budget should always be balanced. C) Deficits should always equal surpluses. D) Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Which of the characteristics would be typical of an industry that is in the maturity stage? A) 1, 2, and 3 B) 4 and 5 C) 6, 7, and 8 D) all of these options

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ________ would be typical of an industry that is in the consolidation stage. A) 6 and 7 B) 1 and 4 C) 5 and 6 D) 2 and 8

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ________ would be typical of an industry that is in the start-up stage. A) 4 and 7 B) 1 and 4 C) 2 and 5 D) none of these options