Question 1

The two components of EPS are:

Accepted Answer

A)  ROA and leverage. 
B)  book value per share and leverage. 
C)  ROE and book value per share. 
D)  leverage and profit margin. 
A)  ROA and leverage. 
B)  book value per share and leverage. 
C)  ROE and book value per share. 
D)  leverage and profit margin. C

Question 2

Which of the following would be found in the "cash flows from investing activities" portion of a firm's statement of cash flows?

Accepted Answer

A)  Changes in accounts receivable 
B)  Depreciation 
C)  Net borrowings 
D)  Capital expenditures 
A)  Changes in accounts receivable 
B)  Depreciation 
C)  Net borrowings 
D)  Capital expenditures D

Question 3

Which of the following represents an estimate of the rate at which a company can grow from internal sources?

Accepted Answer

A)  Return on assets 
B)  Sustainable growth rate 
C)  Adjusted EPS 
D)  Return on equity 
A)  Return on assets 
B)  Sustainable growth rate 
C)  Adjusted EPS 
D)  Return on equity B

Question 4

All else the same, firms with higher net profit margins should have higher P/S ratios.

Accepted Answer

A) True 
 B)False

Question 5

Positive earnings surprises generally outnumber negative surprises.

Accepted Answer

A) True 
 B)False

Question 6

The auditor's report:

Accepted Answer

A)  guarantees accuracy of the financial statements. 
B)  guarantees the quality of the earnings. 
C)  attests that the statements are a fair presentation of financial position. 
D)  includes a recommendation on the stock. 
A)  guarantees accuracy of the financial statements. 
B)  guarantees the quality of the earnings. 
C)  attests that the statements are a fair presentation of financial position. 
D)  includes a recommendation on the stock.

Question 7

How would you explain P/E ratio differences among companies? By differences in investor:

Accepted Answer

A)  expectations about the future growth of the market. 
B)  estimates of the recent growth of earnings. 
C)  expectations about the future growth of earnings. 
D)  estimates about the recent growth of dividends. 
A)  expectations about the future growth of the market. 
B)  estimates of the recent growth of earnings. 
C)  expectations about the future growth of earnings. 
D)  estimates about the recent growth of dividends.

Question 8

If the dividend growth rate increases for a firm, its P/E should:

Accepted Answer

A)  increase. 
B)  stay the same. 
C)  decrease. 
D)  increase or decrease depending how it relates to economic growth. 
A)  increase. 
B)  stay the same. 
C)  decrease. 
D)  increase or decrease depending how it relates to economic growth.

Question 9

What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?

Accepted Answer

The FASB and the SEC are separate organi

Question 10

Some analysts believe that the P/E ratio of a fairly-valued company will equal its expected growth rate.

Accepted Answer

A) True 
 B)False

Question 11

EBITDA, sometimes called operating profit, is often emphasized by biotech companies because of their lack of real profitability.

Accepted Answer

A) True 
 B)False

Question 12

What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Accepted Answer

Quality of earnings generally has to do

Question 13

Free cash flow represents money left after all the bills are paid and dividend
payments are made.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following approaches best indicates how EPS should be computed? Take after-tax net income and divide by:

Accepted Answer

A)  current common shares outstanding. 
B)  previous years common shares outstanding. 
C)  treasury shares outstanding. 
D)  average common shares outstanding. 
A)  current common shares outstanding. 
B)  previous years common shares outstanding. 
C)  treasury shares outstanding. 
D)  average common shares outstanding.

Question 15

To estimate the intrinsic value of a firm, investors could use the dividend discount model to estimate intrinsic value, or an earnings multiplier model based on a forecast of next year's EPS and what is thought to be an appropriate P/E ratio.

Accepted Answer

A) True 
 B)False

Question 16

EPS are of higher quality if:

Accepted Answer

A)  the company is a blue chip. 
B)  the auditor's reputation is high. 
C)  they were derived using conservative principles. 
D)  FASB has approved them. 
A)  the company is a blue chip. 
B)  the auditor's reputation is high. 
C)  they were derived using conservative principles. 
D)  FASB has approved them.

Question 17

Garner Inc. and Tanex Corp. are competitors in the equipment manufacturing industry. Garner has a P/S ratio of 3.2, whereas Tanex has a P/S ratio of 1.8. Which of the following best justifies the difference in P/S ratios between the two firms? Relative to Garner, Tanex has a:

Accepted Answer

A)  higher total asset turnover. 
B)  lower beta. 
C)  lower net profit margin. 
D)  lower total asset turnover. 
A)  higher total asset turnover. 
B)  lower beta. 
C)  lower net profit margin. 
D)  lower total asset turnover.

Question 18

Other things equal, if the:

Accepted Answer

A)  required return increases, the P/E ratio will rise. 
B)  risk premium increases, the P/E ratio will rise. 
C)  risk-free rate rises, the P/E ratio will fall. 
D)  dividend payout increases, the P/E ratio will fall. 
A)  required return increases, the P/E ratio will rise. 
B)  risk premium increases, the P/E ratio will rise. 
C)  risk-free rate rises, the P/E ratio will fall. 
D)  dividend payout increases, the P/E ratio will fall.

Question 19

Can an investor who wants to use the approach of projected earnings and P/Es find help in Value Line?

Accepted Answer

Yes. In fact, Value

Question 20

What three variables affect the P/E ratio? How does each affect it?

Accepted Answer

Using the model P/E = (D₁/E₁)/(k - g), the

Exam 15: Company Analysis

The two components of EPS are:

Which of the following would be found in the "cash flows from investing activities" portion of a firm's statement of cash flows?

Which of the following represents an estimate of the rate at which a company can grow from internal sources?

All else the same, firms with higher net profit margins should have higher P/S ratios.

Positive earnings surprises generally outnumber negative surprises.

The auditor's report:

How would you explain P/E ratio differences among companies? By differences in investor:

If the dividend growth rate increases for a firm, its P/E should:

What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?

Some analysts believe that the P/E ratio of a fairly-valued company will equal its expected growth rate.

EBITDA, sometimes called operating profit, is often emphasized by biotech companies because of their lack of real profitability.

What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Free cash flow represents money left after all the bills are paid and dividend payments are made.

Which of the following approaches best indicates how EPS should be computed? Take after-tax net income and divide by:

To estimate the intrinsic value of a firm, investors could use the dividend discount model to estimate intrinsic value, or an earnings multiplier model based on a forecast of next year's EPS and what is thought to be an appropriate P/E ratio.

EPS are of higher quality if:

Garner Inc. and Tanex Corp. are competitors in the equipment manufacturing industry. Garner has a P/S ratio of 3.2, whereas Tanex has a P/S ratio of 1.8. Which of the following best justifies the difference in P/S ratios between the two firms? Relative to Garner, Tanex has a:

Other things equal, if the:

Can an investor who wants to use the approach of projected earnings and P/Es find help in Value Line?

What three variables affect the P/E ratio? How does each affect it?

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