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Series 86 > Additional > Flashcards

Additional Flashcards

1
Q

What is comparable transaction analysis typically used for?

A

M&A transactions

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1
Q

Which person of interest cares most about EBIT and Free CFs?

A

Creditors care more about EBIT, whereas shareholders care more about free CFs

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2
Q

How to calculate COE using the DGM:

A

(D1 ÷ P0) + g

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3
Q

Public float

A

The portion of a company’s outstanding shares that is in the hands of public investors, as opposed to company officers, directors, or stockholders that hold controlling interests.

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4
Q

Asset utilization

A

How efficiently a company is at creating revenue and profits.

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5
Q

What does a change in quality of earnings stem from?

A

Internal decisions/issues.

NOT external decisions/issues.

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6
Q

Percentage of earnings

A

The term “percentage of earnings” typically has two meanings: (1) the percentage of earnings (or net income) retained or (2) the percentage of earnings (or net income) paid out in the form of dividends.

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7
Q

True or false: Issuing debt to build a fixed asset will impact earnings immediately?

A

False, it won’t impact earnings immediately

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8
Q

True or false: Consensus estimates are the average or median of all research analysts that cover that company. If a research report is estimating significantly higher earnings, it should cite and reference the consensus estimate as a comparison?

A

True

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9
Q

WACC tends to decrease in inflationary periods?

A

False, increase since COD goes up

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10
Q

True or false: Fully diluted EPS uses enterprise value in the numerator?

A

False, implied equity value is used in the numerator

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11
Q

True or false: The commerce department publishes GDP data that is seasonably adjusted?

A

True

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12
Q

Diseconomies of scope

A

When a company has to increase the costs of production or advertising for a specific bundle of products.

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13
Q

True or false: If the accounts receivable growth rate is below the sales growth rate, it’s an indicator that channel stuffing may be occurring?

A

False, if the accounts receivable growth rate exceeds the sales growth rate, it’s an indicator that channel stuffing may be occurring.

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14
Q

True or false: A decrease in days sales outstanding (DSO) indicates channel stuffing?

A

False, an increase in days sales outstanding (DSO) indicates channel stuffing.

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15
Q

True or false: The cost of capital must include the expenses of underwriting the project?

A

True

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16
Q

True or false: Comparable transaction analyses are typically used for IPOS?

A

False

  • This method is used to value the price an acquirer may offer a target company, but is generally not used to value an IPO.
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17
Q

True or false: Debt offerings will cause a firm’s NI and operating income to decline?

A

False, operating income is EBIT, so it’s before interest expense. Therefore, operating income won’t change. NI will decline due to debt-related expenses.

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18
Q

True or false: As the economy peaks, cyclical companies will have the largest earnings momentum?

A

True

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19
Q

True or false: EBITDA includes CAPEX?

A

False

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20
Q

True or false: EBITDA includes R&D?

A

True

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21
Q

True or false: Market capitalization refers to the market value of equity shares outstanding, both common and preferred?

A

True

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22
Q

True or false: If a firm has no debt, FCFF and FCFE are the same?

A

True

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23
Q

True or false: Accelerated depreciation is permitted for GAAP reporting, but tax rules only permit the use of straight line for reporting to shareholders.

A

False, accelerated depreciation is permitted for tax reporting, but GAAP rules only permit the use of straight line for reporting to shareholders.

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24
Q

True or false: If the earnings yield on the stock market is lower than 10-year Treasury yields, it’s implied that the equity markets are undervalued.

A

False, if the earnings yield on the stock market is larger than 10-year Treasury yields, it’s implied that the equity markets are undervalued.

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25
Q

True or false: Short-term interest rates are more volatile than long-term rates?

A

True

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26
Q

True or false: Equity prices tend to react inline to changes in short-term interest rates?

A

False, equity prices tend to react inversely to changes in short-term interest rates.

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27
Q

True or false: sources and uses of funds statement is always in balance?

A

True

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28
Q

True or false: Employee stock options will only be exercised if the options have intrinsic value (i.e., when the offer value exceeds the strike price)?

A

True

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29
Q

True or false: Insider purchases will likely cause a stock’s price to decline?

A

False

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30
Q

True or false: P/B should only be used for companies with mostly liquid assets?

A

True

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31
Q

True or false: According to FINRA, computer software has low barriers to entry?

A

True

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32
Q

True or false: An increase in the growth rate for a company should result in a lower valuation of the company’s DCFs and an overall lower valuation for the company?

A

False, An increase in the growth rate for a company should result in a higher valuation of the company’s DCFs and an overall higher valuation for the company.

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33
Q

CAPEX and dividends paid are a form of CFI?

A

False, CAPEX is CFI while dividends paid are CFF

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34
Q

True or false: P/B is better used when evaluating companies over the short-run?

A

False, long-run

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34
Q

True or false: Companies w/ lower WACCs will typically have higher shares prices and higher P/E ratios?

A

True

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35
Q

True or false: Companies w/ lower earnings growth rates will typically have high P/E multiples?

A

False

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36
Q

True or false: Capital intensive industries are frequently evaluated using an EV / EBITDA approach?

A

True

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37
Q

True or false: EBITDA margins allow RAs to compare companies w/ different capital structures?

A

False

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38
Q

True or false: For DDMs to be applicable for valuation, dividends need to be consistent?

A

True

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39
Q

True or false: Chipmakers have a large amount of inventory on their balance sheets?

A

False

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40
Q

Fixed-charge coverage ratio

A

Measures the ability to meet fixed charges such as interest and lease payments. This ratio is a solvency ratio that measures how many times a business can meet its fixed obligations.

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41
Q

True or false: Failure to obtain FDA approval for the new products is one of the most significant risks faced by biotech companies?

A

True

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42
Q

True or false: An insufficient amount of capital to launch a new product is generally considered a less significant risk for biotech companies than the need to obtain additional financing?

A

False, more significant risk

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43
Q

True or false: Low unemployment and lower-than-expected inflation generally signal the peak of a market?

A

True

44
Q

True or false: Accounts receivable and inventory most likely provide insight into the near-term problems that a company faces?

A

True

  • Accounts payable include a variety of accruals that would be difficult to pinpoint.
45
Q

True or false: DCFs are good when free CFs are negative?

A

False

46
Q

True or false: Reverse stock splits increase common shares outstanding?

A

False, decrease

47
Q

True or false: Selling concessions include the total underwriting fee?

A

True

48
Q

Leverage ratio

A

Any type of financial ratio that indicates the level of debt incurred by a business entity against several other accounts in its balance sheet, income statement, or cash flow statement.

49
Q

True or false: When the company’s current ratio is > than 1, and the company uses cash to retire short-term notes payable, both the current ratio and asset turnover ratio will increase?

A

True

50
Q

What is the best way to estimate mature companies’ earnings growth?

A

Real GDP

51
Q

True or false: EBITDA is a GAAP measure?

A

False, it’s a non-GAAP item. This must be disclosed if referenced in an SEC filing.

52
Q

Where would an RA look to get more color on restructuring charges?

A

The IS in the operating section, as well as in the footnotes of a company’s Form 10-K.

53
Q

Examples of non-GAAP measures:

A
  • Exclusion of special charges
  • Exclusion of amortization of purchased intangibles
  • Exclusion of tax-affected, acquisiton-related expenses, interest expense, income tax effects, and impairment of long-lived assets.
  • EBITDA
  • Free CF
54
Q

True or false: Industrial producers and technology companies require greater capital expenditures than most other sectors?

A

True

55
Q

True or false: if the Rf increases, while the expected return remains stable, a company that has a beta less than 1.0 will experience a decrease in the WACC?

A

False, the WACC will increase

56
Q

True or false: FIFO will reflect a lower COGS in an inflationary period?

A

True, during periods of high inflation, the cost of producing goods will be higher.

57
Q

True or false: Higher operating margins would be expected to negatively impact a company’s earnings, resulting in a lower valuation?

A

False, it would positively impact earnings, resulting in a higher valuation

58
Q

Systematic risk

A

The risk of holding securities that are exposed to movements in the market rather than risk associated with investing in individual companies.

59
Q

True or false: Employee severance packages are a current liability?

A

True

60
Q

True or false: Although the P/E could be calculated using basic or diluted EPS, the more conservative method would be to calculate it using basic EPS?

A

False, although the P/E could be calculated using basic or diluted EPS, the more conservative method would be to calculate it using diluted EPS.

61
Q

True or false: Restricted and control stock is included in market cap?

A

True

62
Q

How do RE companies grow sales?

A
  • Raise rents
  • Acquire new properties
63
Q

True or false: EBITDA neutralizes the effect of different capital structures and different accounting methods for depreciation and amortization?

A

True

64
Q

When should the Gordon Growth Model be used?

A

The Gordon model should be used to value a firm that’s in a steady state with dividends growing at a steady rate and expected to stay stable in the long term.

65
Q

Earnings yield

A

The amount of earnings that one dollar of investment will purchase.

Formula: EPS ÷ price per share

66
Q

Systematic vs unsystematic risk

A

Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market.

67
Q

True or false: Scalable products allow a company to increase its production faster than its costs?

A

True

68
Q

Capacity utilization

A

Measures how much of its maximum product capacity a company produces.

69
Q

True or false: Information about supply lead times and backlogs, although important, would be best obtained w/ senior mgmt., rather than at the production level?

A

False, information about supply lead times and backlogs, although important, would be best obtained at the production level, rather than with senior managers.

70
Q

True or false: Tech companies, more so than other sectors, exhibit low year-over-year sales growth and earnings growth?

A

False, they exhibit high YOY sales and earnings growth

71
Q

True or false: EBITDA minus capital expenditures may be used as an approximation of free cash flow?

A

True

72
Q

Common explanations for a lower P/E multiple when other things are similar:

A
  1. Extraordinary events- such as litigation
  2. Lower expectations of growth
  3. A higher cost of capital
73
Q

Fair value

A

An estimate of the potential market price of goods and services, the value of assets, or the value of a company.

74
Q

Companies w/ high depreciation relative to sales:

A
  • Energy exploration
  • Shipping
  • Utilities
75
Q

True or false: If the EPS is higher when the convertible shares are antidilutive, the diluted EPS is reported as equal to basic EPS?

A

True

76
Q

True or false: In their annual reports, companies will discuss industry competition and risks to their business?

A

True

77
Q

True or false: The beta that is used in the WACC formula is the unlevered beta?

A

False, the levered beta

78
Q

True or false: Housing starts must be obtained before building permits can be obtained?

A

False, building permits must be obtained before housing starts can take place.

79
Q

True or false: Industrial companies generally have a lower P/E than the S&P 500 Index?

A

True

80
Q

True or false: Economic Profit, also known as economic value (EVA) is generated when returns exceed the cost of capital?

A

True

81
Q

Limitations of DCF analysis:

A
  1. Not useful when the company does not generate free CFs (also not useful when companies generate little to no sales)
  2. A discount rate that is too high or too low will skew the valuation of the company.
  3. It assumes a constant capital structure
82
Q

Accounts receivable securitization program

A

When a company transfers a portion of its accounts receivables to a trust and sells interests in that trust. The sale of the receivables to the trust allows the company to receive cash from investors, who then receive payments from the trust. This will lower the accounts receivables on the company’s balance sheet. This is a way for a company to raise capital by borrowing funds (it is a type of debt) backed by an asset (accounts receivables). The investors usually will have no recourse against the company beyond the assets held in the trust.

83
Q

True or false: Higher multiples tend to be associated with lower profitability?

A

False, higher multiples tend to be associated with higher profitability

84
Q

Excess capacity

A

A sign that consumer demand is lower than a company’s ability to produce goods and services.

85
Q

When would an analyst use the Inventory Turnover Ratio?

A

When comparing companies with similar product lines.

86
Q

How is the amount of earnings available to common stockholders calculated?

A

NI - preferred dividends

87
Q

What effect would a lower receivable turnover ratio have on a firm?

A

It would reduce CFs

88
Q

In which section of the cash flows statement would the acquisition of another corporation appear?

A

CFI

89
Q

True or False: Sources and Uses of Cash are items found on an entity’s income statement?

A

False, cash flow statement

90
Q

True or false: If sales increase more than costs, margins will decrease?

A

False, if sales increase more than costs, margins will increase

91
Q

True or false: The basic dividend discount model is most appropriate for preferred stock?

A

True

92
Q

What is the terminal value?

A

EV/EBITDA

93
Q

What indicates a company’s growth is accelerating?

A

When the relative valuation metric is higher than the expected metric of the index.

94
Q

Unissued stock

A

Shares a company is authorized to issue but which have never been sold to investors.

95
Q

True or false: The asset turnover ratio is a good way to detemine the effects that supply constraints have on sales?

A

True

96
Q

True or false: Price/Sales ratios among similar retailers are frequently within a narrow range of values. Companies outside of this range (outliers) are expected to have relatively strong or weak revenue growth?

A

True

97
Q

True or false: Shipping, steel, and housing are defensive industries?

A

False, shipping, steel, and housing are cyclical industries.

98
Q

True or false: High return on common equity indicates a higher P/E?

A

True

99
Q

The dividend payout ratio and current ratio influence P/E?

A

False

100
Q

True or false: After creating a finance lease, the long-term debt of the company will be increased by the present value of the lease payments?

A

True

101
Q

True or false: If an asset is written down, RE will rise?

A

False, RE will also fall in order to balance the b/s.

102
Q

True or false: Repurchased shares are included in market cap?

A

False, a company’s market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, restricted shares, and shares held by insiders, but doesn’t include treasury stock.

103
Q

True or false: Traditional measures such as P/E ratios and book value multiples have little relevance for new economic enterprises that may not generate accounting profits for several years?

A

True

104
Q

True or false: PEG ratios work w/ negative earnings?

A

False

105
Q

True or false: EPS is not unique to a particular issuer and readily comparable to other companies?

A

False, EPS is unique to a particular issuer and not readily comparable.

106
Q

Higher operating margins indicate higher EV?

A

True

107
Q

True or false: EBITDA is often used as a proxy for CFO for the purpose of calculating debt coverage ratios?

A

True

108
Q

Which ratio is the MOST appropriate to account for the debt burden of a company?

A

D/EBITDA

109
Q

True or false: capital intensive businesses are cyclical?

A

True

Series 86 (7 decks)

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