Question 1

An inconsistency between a stock's P/E ratio and growth rate can be attributed to all of the following, except

Accepted Answer

A)  A major difference in the risk involved. 
B)  Inaccurate growth estimates. 
C)  An undervaluation of the stock. 
D)  An overvaluation of the stock. 
E)  Competition. 
A)  A major difference in the risk involved. 
B)  Inaccurate growth estimates. 
C)  An undervaluation of the stock. 
D)  An overvaluation of the stock. 
E)  Competition. E

Question 2

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

Accepted Answer

A) True 
 B)False  True

Question 3

Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today. Johnson Company expects a constant growth of 5% in dividends forever. The required rate of return for this company's common stock is 13%. What is the value of one share of common stock?

Accepted Answer

A)  $1.55 
B)  $13.46 
C)  $14.13 
D)  $21.88 
E)  $22.97 
A)  $1.55 
B)  $13.46 
C)  $14.13 
D)  $21.88 
E)  $22.97 E

Question 4

Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.

Accepted Answer

A) True 
 B)False

Question 5

A firm that follows a low cost leadership strategy

Accepted Answer

A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above. 
A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above.

Question 6

An overvalued stock is a non-growth stock.

Accepted Answer

A) True 
 B)False

Question 7

Speculative 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 8

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 9-7
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 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. $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 10 \% \
2011 & 15 \% \
2012 & 20 \% \
2013 & 25 \% \
2014 & 20 \% \
2015 & 15 \% \
2016 & 10 \% \
2017 & 7 \%
\end{array}$$ 
From year 2018 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 9-7. Calculate the required rate of return on equity.

Accepted Answer

A)  5% 
B)  9.2% 
C)  10.2% 
D)  10% 
E)  4.3% 
A)  5% 
B)  9.2% 
C)  10.2% 
D)  10% 
E)  4.3%

Question 10

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 11

Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Which of the following is a business 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 14

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

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 9-9
USE THE FOLLOWING INFORMATION FOR THE NEXT 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 12/31/2009.
(000s omitted) 
$\begin{array}{lr}
 \text { Sales } &5,450 \
 \text { Cost of Goods Sold } &\underline {3,250 }\
 \text { Gross Profit } & 2,200 \
 \text {Depreciation  } &820 \
 \text {Operating Expenses  } &470 \
 \text { Administration Exp. } &\underline {115 }\
 \text {Operating Profit  } & 795 \
 \text { Interest Expense } &\underline {88} \
 \text { Profit Before Taxes } & 707 \
 \text {Taxes  } &\underline {247} \
 \text { Net Income } & 460 \
 \text {Dividende   } &250
\end{array}$ $\begin{array}{lrlr}
\text { Assets } &&  {\text { Liabilities }} \
\hline \text { Cash } & 100 & \text { Notes Payable } & 850 \
\text { Accounts Receivable } & 1,250 & \text { Accounts Payable } &  \underline{1,550} \
\text { Inventory } &  \underline{1,125} & \text { Total Current Liab. } & {2,400}\
\text { Total Current Assets } &  {2,475}&{\text { Long Term Debt }} & 425 \
\text { Net Fixed Assets } &  \underline{1,450} & \text { Common Stock } &400 \
 {\text { Total Assets }} &{3,925} & \text { Retained Earnings } & \underline{700 }\
&&(\text { Total Liab \& Earnings }&3,925\
\end{array}$
-Refer to Exhibit 9-9. Calculate the return on equity (ROE) for Rollerball Corporation and the Industry. $\begin{array}{lrr}
&\text { Rollerball } & \text { Industry Average } \
\hline\text { I. } & 115.0 \% & 67.5 \% \
\text { II. } & 65.7 \% & 33.0 \% \
\text { III. } & 41.8 \% & 33.0 \% \
\text { IV. } & 19.1 \% & 15.7 \% \
\text { V. } & 87 \% & 157 \%
\end{array}$

Accepted Answer

A)  I 
B)  II 
C)  III 
D)  IV 
E)  V 
A)  I 
B)  II 
C)  III 
D)  IV 
E)  V

Question 16

Which of the following is not a technique for valuing a firm's common stock?

Accepted Answer

A)  Present value of free cash flow to equity 
B)  Present value of dividends 
C)  Price-earnings ratio 
D)  Price-book value ratios 
E)  Price-cost of goods sold ratio 
A)  Present value of free cash flow to equity 
B)  Present value of dividends 
C)  Price-earnings ratio 
D)  Price-book value ratios 
E)  Price-cost of goods sold ratio

Question 17

Exhibit 9-8
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 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 $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 25 \% \
2011 & 20 \% \
2012 & 15 \% \
2013 & 10 \% \
2014 & 12 \% \
2015 & 14 \% \
2016 & 16 \% \
2017 & 198
\end{array}$$ 
From year 2018 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 9-8. Calculate the intrinsic value of the stock now (Year 2009).

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 18

Exhibit 9-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. $\begin{array}{llcc}
  \text {LIFO reserve  } & 60 \
 \text { Net plant, property, and equipment  } & 1325 \
  \text { Other assets  } &30  \
 \text {Goodwill  } &325  \
  \text {  Accumulated Goodwill amortized  } &  65\
 \text { PV of Operating leases } & 140 \
  \text { Tax benefit from interest on expenses   } &  10\
 \text {Tax benefit from interest on leases   } &5  \
  \text { Taxes on non-operating income  } &2  \
 \text {Implied interest on op. lease  } & 9.5 \
  \text {   Increase in LIFO reserve  } & 12 \
 \text { Goodwill amortization  } & 15 \
  \text { Operating profit   } &  550\
 \text { Income tax expense  } & 215 \
  \text {  Net working capital  } & 440 \
 \text { WACC } &  0.12\
\end{array}$

-Refer to Exhibit 9-6. Calculate the adjusted operating profits before taxes.

Accepted Answer

A)  $586.5 
B)  $225.64 
C)  $825.23 
D)  $831.56 
E)  $692.5 
A)  $586.5 
B)  $225.64 
C)  $825.23 
D)  $831.56 
E)  $692.5

Question 19

Which of the following is not a value added performance measure?

Accepted Answer

A)  Economic Value Added (EV
A)  
B)  Market Value Added (MV
A)  
C)  Franchise Factor 
D)  Company Value Added (CV
A)  
E)  None of the above (that is, all are value added performance measures) 
A)  Economic Value Added (EV
A)  
B)  Market Value Added (MV
A)  
C)  Franchise Factor 
D)  Company Value Added (CV
A)  
E)  None of the above (that is, all are value added performance measures)

Question 20

Exhibit 9-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. $\begin{array}{llcc}
  \text {LIFO reserve  } & 60 \
 \text { Net plant, property, and equipment  } & 1325 \
  \text { Other assets  } &30  \
 \text {Goodwill  } &325  \
  \text {  Accumulated Goodwill amortized  } &  65\
 \text { PV of Operating leases } & 140 \
  \text { Tax benefit from interest on expenses   } &  10\
 \text {Tax benefit from interest on leases   } &5  \
  \text { Taxes on non-operating income  } &2  \
 \text {Implied interest on op. lease  } & 9.5 \
  \text {   Increase in LIFO reserve  } & 12 \
 \text { Goodwill amortization  } & 15 \
  \text { Operating profit   } &  550\
 \text { Income tax expense  } & 215 \
  \text {  Net working capital  } & 440 \
 \text { WACC } &  0.12\
\end{array}$

-Refer to Exhibit 9-6. Calculate the cash operating expenses for the firm.

Accepted Answer

A)  225 
B)  228 
C)  232 
D)  242 
E)  252 
A)  225 
B)  228 
C)  232 
D)  242 
E)  252

An inconsistency between a stock's P/E ratio and growth rate can be attributed to all of the following, except

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today. Johnson Company expects a constant growth of 5% in dividends forever. The required rate of return for this company's common stock is 13%. What is the value of one share of common stock?

Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.

A firm that follows a low cost leadership strategy

An overvalued stock is a non-growth stock.

Speculative companies are firms where

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Cyclical companies are firms where

Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.

Market value-added is a measure of ____ performance.

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

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

Which of the following is not a technique for valuing a firm's common stock?

Which of the following is not a value added performance measure?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 9: Company Analysis and Stock Valuation

An inconsistency between a stock's P/E ratio and growth rate can be attributed to all of the following, except

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today. Johnson Company expects a constant growth of 5% in dividends forever. The required rate of return for this company's common stock is 13%. What is the value of one share of common stock?

Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.

A firm that follows a low cost leadership strategy

An overvalued stock is a non-growth stock.

Speculative companies are firms where

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Cyclical companies are firms where

Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.

Market value-added is a measure of ____ performance.

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

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

Which of the following is not a technique for valuing a firm's common stock?

Which of the following is not a value added performance measure?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters