Question 1

A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

Accepted Answer

A)  Growth 
B)  Defensive 
C)  Cyclical 
D)  Speculative 
E)  Value 
A)  Growth 
B)  Defensive 
C)  Cyclical 
D)  Speculative 
E)  Value

Question 2

Given Birdchip's beta of 1.25 and a risk free rate of 6 percent,what is the expected rate of return assuming a 12 percent market return?

Accepted Answer

A)  1% 
B)  10% 
C)  11% 
D)  12% 
E)  31% 
A)  1% 
B)  10% 
C)  11% 
D)  12% 
E)  31%

Question 3

A defensive company is one whose sales,earnings and cash flows are strongly correlated with the business cycle.

Accepted Answer

A) True 
 B)False

Question 4

An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 14.2
Use the Information Below for the Following Problem(S)
Modular Industries currently has a 16% annual growth rate while the market average is 6 percent. The market multiple is 10.
-Refer to Exhibit 14.2.Determine the justified P/E ratio for Modular Industries assuming Modular can maintain its superior growth rate for the next 5 years.

Accepted Answer

A)  6.4 
B)  13.1 
C)  16.5 
D)  23.8 
E)  15.7 
A)  6.4 
B)  13.1 
C)  16.5 
D)  23.8 
E)  15.7

Question 6

Under the present value of operating free cash flow technique,the firm's operating free cash flow to the firm is discounted at the firm's

Accepted Answer

A)  Weighted average cost of capital. 
B)  Cost of debt. 
C)  Internal rate of return. 
D)  External cost of new equity. 
E)  Net present value. 
A)  Weighted average cost of capital. 
B)  Cost of debt. 
C)  Internal rate of return. 
D)  External cost of new equity. 
E)  Net present value.

Question 7

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the intrinsic value of the stock now (Year 2010).

Accepted Answer

A)  $155.55 
B)  $173.27 
C)  $196.44 
D)  $207.79 
E)  $108.30 
A)  $155.55 
B)  $173.27 
C)  $196.44 
D)  $207.79 
E)  $108.30

Question 8

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-Based on the information provided,calculate the intrinsic value in 2010 of a share of INV Corp.using the FCFF (free cash flow to the firm)model.For 2010 the FCFF was $30,000,total debt was $20,000,and there were 12000 shares outstanding.The required rate of return is 9% and the estimated growth rate in FCFF is 6.5%.

Accepted Answer

A)  $104.83 
B)  $153.25 
C)  $112.50 
D)  $94.92 
E)  $80.45 
A)  $104.83 
B)  $153.25 
C)  $112.50 
D)  $94.92 
E)  $80.45

Question 9

A growth company is one that has the ability to

Accepted Answer

A)  Acquire capital at a low cost and is able to invest in projects that yield an average return. 
B)  Acquire capital at a low cost and is able to invest in projects that yield a below average return. 
C)  Acquire capital at an average cost and is able to invest in projects that yield an above average return. 
D)  Acquire capital at an average cost and is able to invest in projects that yield an average return. 
E)  Acquire capital at an above average cost and is able to invest in projects that yield an average return. 
A)  Acquire capital at a low cost and is able to invest in projects that yield an average return. 
B)  Acquire capital at a low cost and is able to invest in projects that yield a below average return. 
C)  Acquire capital at an average cost and is able to invest in projects that yield an above average return. 
D)  Acquire capital at an average cost and is able to invest in projects that yield an average return. 
E)  Acquire capital at an above average cost and is able to invest in projects that yield an average return.

Question 10

Which of the following is a management tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish

Question 11

The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.

Accepted Answer

A) True 
 B)False

Question 12

In Berkshire Hathoway annual reports Warren Buffet highlights financial tenets that he believes are important.Which of the following is not a financial tenet of Warren Buffet?

Accepted Answer

A)  Focus on return on equity (RO
E)  not earnings per share (EPS). 
B)  Calculate owner earnings similar to free cash flow after capital expenditures. 
C)  High profit margins relative to the industry. 
D)  Company should create at least one dollar of market value for every dollar retained. 
E)  All of the above are financial tenets of Warren Buffet. 
A)  Focus on return on equity (RO
E)  not earnings per share (EPS). 
B)  Calculate owner earnings similar to free cash flow after capital expenditures. 
C)  High profit margins relative to the industry. 
D)  Company should create at least one dollar of market value for every dollar retained. 
E)  All of the above are financial tenets of Warren Buffet.

Question 13

Exhibit 14.4
Use the Information Below for the Following Problem(S)
The Valentine Company currently has a 14% annual growth rate while the market average is 4 percent. The market multiple is 15.
-Refer to Exhibit 14.4.Determine the P/E ratio for the Valentine Company assuming Valentine can maintain its superior growth rate for the next 5 years.

Accepted Answer

A)  23.7 
B)  16.4 
C)  15.3 
D)  8.3 
E)  3.8 
A)  23.7 
B)  16.4 
C)  15.3 
D)  8.3 
E)  3.8

Question 14

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the firm's EVA.

Accepted Answer

A)  85.2 
B)  72.3 
C)  65.8 
D)  89.5 
E)  78.2 
A)  85.2 
B)  72.3 
C)  65.8 
D)  89.5 
E)  78.2

Question 15

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 14.4
Use the Information Below for the Following Problem(S)
The Valentine Company currently has a 14% annual growth rate while the market average is 4 percent. The market multiple is 15.
-Refer to Exhibit 14.4.Determine the justified P/E ratio for the Valentine Company assuming Valentine can maintain its superior growth rate for the next 10 years.

Accepted Answer

A)  3.0 
B)  9.2 
C)  16.6 
D)  28.6 
E)  37.6 
A)  3.0 
B)  9.2 
C)  16.6 
D)  28.6 
E)  37.6

Question 17

Given Gitech's beta of 1.55 and a risk free rate of 8 percent,what is the expected rate of return assuming a 14 percent market return?

Accepted Answer

A)  12.4% 
B)  14.3% 
C)  17.3% 
D)  20.4% 
E)  29.7% 
A)  12.4% 
B)  14.3% 
C)  17.3% 
D)  20.4% 
E)  29.7%

Question 18

In Berkshire Hathoway annual reports Warren Buffet highlights business tenets that he believes are important.Which of the following is not a business tenet of Warren Buffet?

Accepted Answer

A)  Is the business unique and technologically advanced? 
B)  Does the business have a consistent operating history? 
C)  Does the business have favorable long-term prospects? 
D)  a and b above. 
E)  All of the above are business tenets of Warren Buffet. 
A)  Is the business unique and technologically advanced? 
B)  Does the business have a consistent operating history? 
C)  Does the business have favorable long-term prospects? 
D)  a and b above. 
E)  All of the above are business tenets of Warren Buffet.

Question 19

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the required rate of return on equity.

Accepted Answer

A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3% 
A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3%

Question 20

A firm's competitive strategy can be either defensive or offensive.

Accepted Answer

A) True 
 B)False

Exam 14: Company Analysis and Stock Valuation

A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

Given Birdchip's beta of 1.25 and a risk free rate of 6 percent,what is the expected rate of return assuming a 12 percent market return?

A defensive company is one whose sales,earnings and cash flows are strongly correlated with the business cycle.

An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.

Under the present value of operating free cash flow technique,the firm's operating free cash flow to the firm is discounted at the firm's

A growth company is one that has the ability to

Which of the following is a management tenet of Warren Buffett?

The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.

In Berkshire Hathoway annual reports Warren Buffet highlights financial tenets that he believes are important.Which of the following is not a financial tenet of Warren Buffet?

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

Given Gitech's beta of 1.55 and a risk free rate of 8 percent,what is the expected rate of return assuming a 14 percent market return?

In Berkshire Hathoway annual reports Warren Buffet highlights business tenets that he believes are important.Which of the following is not a business tenet of Warren Buffet?

A firm's competitive strategy can be either defensive or offensive.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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