Question 1

Which of the following would increase a firm's current calculated FCFF?

Accepted Answer

The answer of Which of the following would increase a...

Question 2

A positive earnings surprise occurs when the forecasted earnings are greater than the actual earnings of a company.

Accepted Answer

A positive earnings surprise occurs when the actual earnings of a company are greater than the forecasted earnings.

Question 3

Firm ABC and Firm XYZ both have ROEs of 18%;however,Firm ABC has a much higher ROA than Firm XYZ.Which of the following do we know to be true?Relative to Firm ABC,Firm XYZ has a higher:

Accepted Answer

The answer of Firm ABC and Firm XYZ both have...

Question 4

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

Accepted Answer

This is known as the "PEG ratio" which stands for price-to-earnings-to-growth ratio. It is a valuation metric used to determine a company's value based on its earnings growth rate. A PEG ratio of 1 indicates that the company is fairly valued, while a PEG ratio greater than 1 suggests that the company is overvalued and a PEG ratio less than 1 suggests that the company is undervalued.

Question 5

It is necessary to determine a point estimate of the intrinsic value of a stock when using relative valuation techniques.

Accepted Answer

Relative valuation techniques rely on comparing the value of a stock to similar stocks or market averages, rather than determining an intrinsic value. Therefore, point estimates of intrinsic value are not necessary in this type of valuation.

Question 6

Since extraordinary items affecting earnings are typically non-recurring,investors should disregard their impact on earnings when evaluating the stock.

Accepted Answer

The answer of Since extraordinary items affecting earnings are typically...

Question 7

The P/E ratio can be expected to change as the expected dividend payout ratio changes.

Accepted Answer

The P/E ratio (price-to-earnings ratio) is calculated by dividing the price of a stock by its earnings per share (EPS). The expected dividend payout ratio, which is the percentage of earnings that a company is expected to pay out as dividends, is a factor that can affect the EPS. If the expected dividend payout ratio increases, the EPS decreases, which in turn can lead to an increase in the P/E ratio. Similarly, if the expected dividend payout ratio decreases, the EPS increases, which can lead to a decrease in the P/E ratio. Therefore, the P/E ratio can be expected to change as the expected dividend payout ratio changes.

Question 8

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

The answer of Garner Inc.and Tanex Corp.are competitors in the...

Question 9

International Financial Reporting Standards (IFRS)are now used by most countries.

Accepted Answer

IFRS are now used by most countries, with over 120 countries requiring or permitting their use for financial reporting purposes.

Question 10

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

Accepted Answer

Free cash flow is calculated as operating cash flow minus capital expenditures, which leaves money available after bills are paid and investments in the company are made. Dividend payments are considered a use of free cash flow rather than a deduction from it.

Question 11

Firm ABC and Firm XYZ both have ROAs of 12%;however,Firm ABC has a much higher ROE than Firm XYZ.Which of the following do we know to be true?Relative to Firm ABC,Firm XYZ has a lower:

Accepted Answer

The answer of Firm ABC and Firm XYZ both have...

Question 12

Some companies,tend to provide low guidance,contributing toward consistently positive earnings surprises.

Accepted Answer

This is true. By providing a conservative or low guidance, companies can set expectations lower than their actual performance, leading to positive earnings surprises.

Question 13

If a company's net income margin decreases,a company can maintain its ROA by increasing its asset turnover.

Accepted Answer

If a company's net income margin decreases, maintaining its ROA (return on assets) would require either increasing its asset turnover or decreasing its total assets. Increasing the asset turnover means using the existing assets more efficiently to generate more revenue. Therefore, the statement is true.

Question 14

Other things being equal,as k rises,the P/E ratio will also rise.

Accepted Answer

The answer of Other things being equal,as k rises,the P/E...

Question 15

Investors interested in buying stocks that report bad news and suffer a sharp decline should buy the first day bad news is reported.

Accepted Answer

This statement is not necessarily true. Investors should do their own research and analysis before deciding to buy a stock that has reported bad news and declined in value. Jumping in on the first day may not always be the best strategy as the stock may continue to decline. It is important to assess the reason for the bad news and the company's overall financial health and potential for future growth before making an investment decision.

Question 16

To estimate the intrinsic value of a company,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

The dividend discount model and earnings multiplier model are both commonly used methods for estimating the intrinsic value of a company. The dividend discount model estimates the present value of future dividend payments, while the earnings multiplier model uses a forecast of next year's earnings per share (EPS) and an appropriate price-to-earnings (P/E) ratio.

Question 17

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

Accepted Answer

Biotech companies often rely on large investments and research and development costs that can obscure their profitability. As a result, they may focus on EBITDA as a measure of their financial performance.

Question 18

Which of the following would increase a firm's PEG ratio?

Accepted Answer

The PEG ratio is calculated by dividing the price-to-earnings (P/E) ratio by the expected earnings growth rate. Therefore, if the P/E ratio increases, the PEG ratio will increase as well, assuming the expected earnings growth rate remains constant. The other answer choices do not have a direct impact on the PEG ratio.

Question 19

Leverage can magnify returns to the stockholders but also increase potential losses to the stockholders.

Accepted Answer

Leverage refers to the use of borrowed funds to increase the potential return on an investment. While this can magnify returns to the stockholders, it also increases potential losses if the investment does not perform as expected. Therefore, the statement is true.

Question 20

The auditor's report guarantees the accuracy of the earnings reported in the financial statements.

Accepted Answer

The auditor's report does not provide a guarantee of the accuracy of the earnings reported in the financial statements. Instead, it provides an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Quiz 15: Company Analysis