Question 1

With respect to the cash flow volatility and earnings volatility of a certain firm,which of the following is most accurate concerning their effects on ratios of market value to capital?

Accepted Answer

A)  Cash flow volatility is more likely to diminish the ratios than earnings volatility is.
B)  Earnings volatility is more likely to diminish the ratios than cash flow volatility is.
C)  Neither of these types of volatility has been proven to have a negative effect on ratios of market value to capital.
D)  Both types of volatility have a negative effect on ratios of market value to capital,but it is not clear which has the stronger effect. A

Question 2

In the 1999 stock bubble,most of the large-capitalization companies with high P/Es were clustered in all of the following sectors EXCEPT:

Accepted Answer

A)  Utilities.
B)  Technology.
C)  Media.
D)  Telecommunications. A

Question 3

In comparing growth stocks and value stocks with respect to growth rates and the return on capital,the results from the article by T.Koller and B.Jiang titled "The Truth about Growth and Value Stocks" (2007 )found which of the following?

Accepted Answer

A)  Growth stocks had a higher average growth rate but a lower median return on capital.
B)  Growth stocks had both a higher average growth rate and a higher median return on capital.
C)  Growth stocks did not have a higher average growth rate or a higher median return on capital.
D)  Growth stocks did not have a higher average growth rate but did have a higher median return on capital. D

Question 4

Which of the following are valid reasons that a firm's stock split can be followed by an increase in the value of the shares of that firm?
I.Signaling.
II.Liquidity.
III.More shares outstanding.
IV.Self-selection.

Accepted Answer

A)  I and IV only.
B)  II and III only.
C)  II,III,and IV only.
D)  None of these.

Question 5

Academic research has found that share prices of companies that are removed from a major stock index:

Accepted Answer

A)  Trend down until significant news arrives to reverse the trend.
B)  Do not experience any abnormal returns either in the short term or in the long term.
C)  Drop immediately and then begin trading normally.
D)  Drop immediately,but the decline is usually reversed within one or two months.

Question 6

Voluntary option expensing has been found to have which of the following effects?

Accepted Answer

A)  A negative impact on share price.
B)  A positive impact on share price.
C)  No impact on share price.
D)  A positive impact if LIFO accounting is used and a negative effect if FIFO accounting is used.

Question 7

Which of the following are ways the managers of firms may try to meet earnings forecasts and have been proven to have an impact on share price?
I.Deferring divestments.
II.Gradually providing new information to lead analysts.
III.Offering customer incentives without immediate costs.
IV.Accounting adjustments such as capitalizing costs and R&D.

Accepted Answer

A)  I and II only.
B)  I and III only.
C)  II and IV only.
D)  III and IV only.

Question 8

Which of the following are properties that should lead to firms having higher value in the stock market?
I.Higher P/E.
II.First-in,first-out (FIFO )accounting.
III.Higher growth.
IV.ROIC greater than the cost of capital.

Accepted Answer

A)  I and II only.
B)  I,II,and III only.
C)  III and IV only.
D)  II,III,and IV only

Question 9

Individual company deviations from fundamental values are rarer than market deviations from fundamental values.

Accepted Answer

A) True 
 B)False

Question 10

Noise-trader risk is caused by:

Accepted Answer

A)  Program trading.
B)  Systematic risk being greater than idiosyncratic risk.
C)  Idiosyncratic risk being greater than systematic risk.
D)  Traders making bets on short-term price movements without reference to fundamental valuations.

Question 11

Which of the following characterize noise traders?
I.They do not care about intrinsic value.
II.They are always in the minority.
III.They can move price outside the bounds of intrinsic value.
IV.They trade on small events.

Accepted Answer

A)  I and II only.
B)  I,III,and IV only.
C)  II,III,and IV only.
D)  II and IV only.

Question 12

Investors care about goodwill impairment only if the adjustment reflects lower-than-expected benefits from the acquisition that have not already been reflected in the stock price.

Accepted Answer

A) True 
 B)False

Question 13

An analysis of 50 European companies that began reporting using U.S.GAAP over the period 1997 to 2004 found which of the following?
I.Earnings under GAAP were generally lower than earnings under the home country's rules.
II.The differences in earnings under the two regimes were all less than 10 percent.
III.The stocks of the 50 companies generally reacted positively when the disclosures were made.
IV.Executives had concerns over the impact of reporting under U.S.GAAP.

Accepted Answer

A)  I and II only.
B)  I,II,and III only.
C)  I,III,and IV only.
D)  II,III,and IV only.

Question 14

Both the 2001 bubble and the 2007 bubble were valuation bubbles.

Accepted Answer

A) True 
 B)False

Question 15

What is the impact on a company's share price of trading done by noise traders?

Accepted Answer

A)  Noise traders buy and sell a great deal,their volume of trading is high,and the long-term effect on share price is low.
B)  Noise traders buy and sell a great deal,their volume of trading is high,and the long-term effect on share price is high.
C)  Noise traders buy and sell a small amount,their volume of trading is low,and the long-term effect on share price is low.
D)  Noise traders set the boundaries for a stock's intrinsic value.

Question 16

Managers should assess whether their company's share price has deviated more than 5 percent from its fundamental value on a weekly basis and,if it has,take appropriate action such as issuing or buying back shares.

Accepted Answer

A) True 
 B)False

Question 17

If investors focused on earnings,a move from FIFO to LIFO would increase the share price,but it generally does the opposite because of the decrease in cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Researchers have found that the stock market is very concerned with earnings volatility and requires companies to meet analyst expectations.

Accepted Answer

A) True 
 B)False

Question 19

Over the past five years,the highest share price for Techno Inc. ,a 15-year-old software company,was around $750,and its lowest price was around $250,while for ConsumerCo,a consumer products firm with a 50-year history,share prices ranged from $85 down to $60 over the same period.Which of the following are the most likely reasons for these stock market reactions?
I.The stock market is reflecting emotions more than fundamentals.
II.Swings in prices reflect changes in expectations of Techno Inc.
III.The range in expectations for Techno Inc.is likely greater than for ConsumerCo.

Accepted Answer

A)  I only.
B)  I and III.
C)  II and III.
D)  I,II,and III.

Question 20

Which of the following is most accurate concerning the bounds on a stock's price set by informed investors and/or the volatility of the stock within those bounds?

Accepted Answer

A)  As long as the price is within the bounds,the volatility will always be relatively low.
B)  Share prices can be significantly volatile within the bounds but only when new information about a company has been revealed;otherwise,volatility will be relatively low.
C)  The bounds are set by mechanical traders and are fairly constant over time.
D)  Share prices can be significantly volatile within the bounds even at times when no new information about a company has been revealed.

Exam 5: The Stock Market Is Smarter Than You Think

With respect to the cash flow volatility and earnings volatility of a certain firm,which of the following is most accurate concerning their effects on ratios of market value to capital?

In the 1999 stock bubble,most of the large-capitalization companies with high P/Es were clustered in all of the following sectors EXCEPT:

In comparing growth stocks and value stocks with respect to growth rates and the return on capital,the results from the article by T.Koller and B.Jiang titled "The Truth about Growth and Value Stocks" (2007 ) found which of the following?

Which of the following are valid reasons that a firm's stock split can be followed by an increase in the value of the shares of that firm? I.Signaling. II.Liquidity. III.More shares outstanding. IV.Self-selection.

Academic research has found that share prices of companies that are removed from a major stock index:

Voluntary option expensing has been found to have which of the following effects?

Which of the following are properties that should lead to firms having higher value in the stock market? I.Higher P/E. II.First-in,first-out (FIFO ) accounting. III.Higher growth. IV.ROIC greater than the cost of capital.

Individual company deviations from fundamental values are rarer than market deviations from fundamental values.

Noise-trader risk is caused by:

Which of the following characterize noise traders? I.They do not care about intrinsic value. II.They are always in the minority. III.They can move price outside the bounds of intrinsic value. IV.They trade on small events.

Investors care about goodwill impairment only if the adjustment reflects lower-than-expected benefits from the acquisition that have not already been reflected in the stock price.

Both the 2001 bubble and the 2007 bubble were valuation bubbles.

What is the impact on a company's share price of trading done by noise traders?

Managers should assess whether their company's share price has deviated more than 5 percent from its fundamental value on a weekly basis and,if it has,take appropriate action such as issuing or buying back shares.

If investors focused on earnings,a move from FIFO to LIFO would increase the share price,but it generally does the opposite because of the decrease in cash flows.

Researchers have found that the stock market is very concerned with earnings volatility and requires companies to meet analyst expectations.

Which of the following is most accurate concerning the bounds on a stock's price set by informed investors and/or the volatility of the stock within those bounds?