Question 1

An undervalued stock is a growth stock.

Accepted Answer

A) True 
 B)False

Question 2

While EVA is considered an internal performance measure,MVA is considered to be an external performance measure.

Accepted Answer

A) True 
 B)False

Question 3

Market value-added is a measure of ____ performance.

Accepted Answer

A)  External 
B)  Internal 
C)  Competitive 
D)  Economic 
E)  None of the above 
A)  External 
B)  Internal 
C)  Competitive 
D)  Economic 
E)  None of the above

Question 4

Cyclical companies are firms where

Accepted Answer

A)  Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy. 
B)  Sales, earnings and cash flows are likely to withstand changes caused by the economic environment. 
C)  Sales, earnings and cash flows are heavily influenced by aggregate business activity. 
D)  Sales, earnings and cash flows are growing exponentially. 
E)  None of the above. 
A)  Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy. 
B)  Sales, earnings and cash flows are likely to withstand changes caused by the economic environment. 
C)  Sales, earnings and cash flows are heavily influenced by aggregate business activity. 
D)  Sales, earnings and cash flows are growing exponentially. 
E)  None of the above.

Question 5

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 present value now (Year 2010)of OFCF during the period of declining growth (that is for years 2015 to 2018).

Accepted Answer

A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326 
A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326

Question 6

Exhibit 14.9
Use the Information Below for the Following Problem(S)
The Rollerball Corporation's industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/Equity = 2.0
Rollerball Corporation has the following financial statements for year ending 12/31/2008. (000's omitted)
 $\begin{array}{lr}
\text { Sales } & 5,450 \
\text { Cost of Goods Sold } & \underline{3,250} \
\text { Gross Profit } & 2,200 \
\text { Depreciation } & 820 \
\text { Operating Expenses } & 470 \
\text { Administration Exp. } & \underline{115} \
 \text { Operating Profit } 795 &  \
\text { Interest Expense } & \underline{88}\
\text { Profit Before Taxes } & 707\
\text { Taxes } & \underline{247}\
\text { Net Income } & 460\
\text{Dividends} & 250
\end{array}$ 
 $\begin{array}{lrlr}
\text { Assets } & & {\text { Liabilities }} \
\text { Cash } & 100 & \text { Notes Payable } & 850 \
\text { Accounts Receivable } & 1,250 & \text { Accounts Payable } & \underline{1,550} \
\text { Inventory } & \underline{1,125} & \text { Total Current Liab. } & 2,400 \
\text { Total Current Assets } & 2,475 & \text { Long Term Debt } & 425 \
\text { Net Fixed Assets } & \underline{1,450} & \text { Common Stock } & 400 \
\text { Total Assets } & 3,925 & \text { Retained Earnings } & \underline{700} \
& & \text { Total Liab. \& Earnings } & 3,925
\end{array}$
-Refer to Exhibit 14.9.Calculate the return on equity (ROE)for Rollerball Corporation and the Industry.
Rollerball Industry Average

Accepted Answer

A)  115.0% 67.5% 
B)  65.7% 33.0% 
C)  41.8% 33.0% 
D)  19.1% 15.7% 
E)  8.7% 15.7% 
A)  115.0% 67.5% 
B)  65.7% 33.0% 
C)  41.8% 33.0% 
D)  19.1% 15.7% 
E)  8.7% 15.7%

Question 7

"Economic profit" is analogous to ____ in capital budgeting.

Accepted Answer

A)  Weighted average cost of capital 
B)  Internal rate of return 
C)  Composite discount rates 
D)  Discounted cashflows 
E)  Net present value 
A)  Weighted average cost of capital 
B)  Internal rate of return 
C)  Composite discount rates 
D)  Discounted cashflows 
E)  Net present value

Question 8

According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm's product is the latest craze.

Accepted Answer

A) True 
 B)False

Question 9

A speculative stock possesses a ____ probability of ____ return and is currently ____.

Accepted Answer

A)  High, negative, underpriced. 
B)  High, negative, overpriced. 
C)  High, positive, overpriced. 
D)  Low, negative, overpriced. 
E)  Low, positive, underpriced. 
A)  High, negative, underpriced. 
B)  High, negative, overpriced. 
C)  High, positive, overpriced. 
D)  Low, negative, overpriced. 
E)  Low, positive, underpriced.

Question 10

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-A firm has a current price of $40 a share,an expected growth rate of 11 percent and expected dividend per share (D1)of $2.Given its risk you have a required rate of return for it of 12 percent.Assuming that you expect the stock price to increase to $42 during the investment period,your expected rate of return and decision would be:

Accepted Answer

A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy 
A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy

Question 11

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the present value now (Year 2010)of FCFE during the period of constant growth (that is for years 2019 onwards).

Accepted Answer

A)  $7,153,368 
B)  $9,703,476 
C)  $15,558,341 
D)  $8,986,012 
E)  $6,789,125 
A)  $7,153,368 
B)  $9,703,476 
C)  $15,558,341 
D)  $8,986,012 
E)  $6,789,125

Question 12

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

Accepted Answer

A) True 
 B)False

Question 13

In SWOT analysis,one examines all of the following factors,except

Accepted Answer

A)  Strengths. 
B)  Weaknesses. 
C)  Opportunities. 
D)  Threats. 
E)  Turnarounds. 
A)  Strengths. 
B)  Weaknesses. 
C)  Opportunities. 
D)  Threats. 
E)  Turnarounds.

Question 14

The following are tenets of Warren Buffett:

Accepted Answer

A)  Business tenets. 
B)  Financial tenets. 
C)  Management tenets. 
D)  All of the above. 
E)  None of the above. 
A)  Business tenets. 
B)  Financial tenets. 
C)  Management tenets. 
D)  All of the above. 
E)  None of the above.

Question 15

What is the implied growth duration of Jones Industries given the following:
$\begin{array}{lcc} 
& \text { SEP Industrials } & \text { Jones Industries } \
\text { P/E Ratios } & 12 & 15 \
\text { Average Growth (\%) } & 6.0 & 10.0 \
\text { Dividend Yield } & .05 & .03
\end{array}$

Accepted Answer

A)  7.2 years 
B)  10.9 years 
C)  12.5 years 
D)  13.9 years 
E)  15.2 years 
A)  7.2 years 
B)  10.9 years 
C)  12.5 years 
D)  13.9 years 
E)  15.2 years

Question 16

Walgreen's higher P/BV ratio than the market or industry is most likely attributed to Walgreen's

Accepted Answer

A)  Consistently higher ROE 
B)  Difference in WACC 
C)  Marketing strategy 
D)  Lower cost of assets 
E)  None of the above 
A)  Consistently higher ROE 
B)  Difference in WACC 
C)  Marketing strategy 
D)  Lower cost of assets 
E)  None of the above

Question 17

What is the implied growth duration of Casey Industries given the following:
$\begin{array}{lcc} 
& \text { SEP Industrials } & \text { Casey Industries } \
 \text { P/E Ratios } & 15 & 20 \
\text { Average Growth }(\%) & 5.0 & 15.0 \
 \text { nirislensl Vielst } & .04&.06
\end{array}$

Accepted Answer

A)  3.2 years 
B)  2.8 years 
C)  4.8 years 
D)  9.6 years 
E)  13.2 years 
A)  3.2 years 
B)  2.8 years 
C)  4.8 years 
D)  9.6 years 
E)  13.2 years

Question 18

The expected rate of return on Rooter Industries is 1.5 times the 16 percent expected rate of return from the market.What is Research's beta if the risk free rate is 8 percent?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5 
E)  6 
A)  2 
B)  3 
C)  4 
D)  5 
E)  6

Question 19

Two major competitive strategies are low-cost leadership and low-price leadership.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-A firm has a current price of $40 a share,an expected growth rate of 11 percent and expected dividend per share (D1)of $2.Given its risk you have a required rate of return for it of 12 percent.Your expected rate of return and investment decision is as follows:

Accepted Answer

A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy 
A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy

Exam 14: Company Analysis and Stock Valuation

An undervalued stock is a growth stock.

While EVA is considered an internal performance measure,MVA is considered to be an external performance measure.

Market value-added is a measure of ____ performance.

Cyclical companies are firms where

"Economic profit" is analogous to ____ in capital budgeting.

According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm's product is the latest craze.

A speculative stock possesses a ____ probability of ____ return and is currently ____.

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

In SWOT analysis,one examines all of the following factors,except

The following are tenets of Warren Buffett:

What is the implied growth duration of Jones Industries given the following: SEP Industrials Jones Industries P/E Ratios 12 15 Average Growth (\%) 6.0 10.0 Dividend Yield .05 .03

Walgreen's higher P/BV ratio than the market or industry is most likely attributed to Walgreen's

What is the implied growth duration of Casey Industries given the following: SEP Industrials Casey Industries P/E Ratios 15 20 Average Growth (\%) 5.0 15.0 nirislensl Vielst .04 .06

The expected rate of return on Rooter Industries is 1.5 times the 16 percent expected rate of return from the market.What is Research's beta if the risk free rate is 8 percent?

Two major competitive strategies are low-cost leadership and low-price leadership.

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

Filters

A speculative stock possesses a probability of return and is currently .