Chap 7

Question 1

Definition of security analysis ?

Answer 1

Process of gathering information, organizing it into logical framework and then using it to determine the intrinsic value of common stock

Question 2

Definition of intrinsic value ?

Answer 2

A mesure of of the underlying worth of a share of stock

Depend of future cash flow
The discount rate
Risk associated with futures performance

Question 3

How is “Top-Down” approach to security analysis ?

Answer 3

Step 1 : economics analysis

Step 2 : industry analysis

Step 3: fundamental analysis

Question 4

The efficient market hypothesis asserts :

Answer 4

• securities are rarely, if ever, substantially mispriced in the market place
• no security analysis in capable of consistently finding mispriced securities

Question 5

Gross domestic product (GDP):

Answer 5

market value of all goods and services produced in a country over a given period

Question 6

Key Economic Factors (economics analysis )

Answer 6

The state of the economy is affected by a wide range of factors:
Government Fiscal Policy
–Taxes
–Government Spending
–Debt management

Monetary Policy
–Money supply
–Interest rates

Other Factors
–Inflation
–Consumer spending
–Business Investments
–Foreign trade and foreign exchange rates

Question 7

Industrial production:

Answer 7

an indicator of the output produced by industrial companies.

–Normally, GDP and index of industrial production move up and down with the business cycle.

Question 8

Key in Industry Analysis:

Answer 8

In analyzing an industry, look at such things as its makeup and basic characteristics, the key economic and operating variables that drive industry performance, and the outlook for the industry.

Step 1: establish the competitive position of a particular industry in relation to other industries.

Step 2: Identify companies within the industry that hold particular promise.
–Look for strong market positions, pricing leadership, economies of scale, etc.

Question 9

Growth cycle:

Answer 9

an industry’s growth cycle reflects the vitality of the industry over time.

–Initial Development: industry is new and risks are very high.

–Rapid Expansion: product acceptance is growing and investors become very interested.

–Mature Growth: expansion comes from growth in the economy and the long-term nature of the industry becomes more apparent.

–Stability or Decline: demand for the industry’s products is diminishing and companies are leaving the industry

Question 10

Fundamental analysis:

Answer 10

the study of the financial affairs of a business for the purpose of understanding the company that issued the common stock

Question 11

Company analysis:

Answer 11

a historical analysis of the financial strength of the firm, using financial statements of the firm.

Question 12

The competitive position of the company is determine by:

Answer 12

The types of assets owned and growth rate of sales

Profit margins and dynamics of earnings

Composition and liquidity of assets (asset mix)

Capital structure (financing mix)

Question 13

Balance Sheet contain …

Answer 13

Assets:

Liabilities:

Stockholders’ equity:

Question 14

Income Statement

Answer 14

provides a financial summary of the operating results of the firm over a period of time such as a quarter or a year.

Revenues (i.e. sales)

Expenses

Profit/Loss

The income statement shows how successful the firm has been in using the assets listed on the balance sheet

Question 15

Ratio analysis:

Answer 15

study of the relationships between various financial statement accounts

Question 16

What Ratios Have to Offer ?

Answer 16

Investors use financial ratios to evaluate the financial condition and operating results of a company and to compare those results to historical or industry standards.

–Compare a company’s ratios from one year to the next.
–Compare a company’s ratios to those of other companies in the same line of business.

Understanding a company’s past performance allows a forecast of its future performance with some degree of confidence.

Question 17

types of financial ratios?

Answer 17

Liquidity

–Activity

–Leverage

–Profitability

–Common Stock (Market) measures

Question 18

Liquidity ratios:

Answer 18

company’s ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due

Question 19

Current Ratio

Answer 19

measures a company’s ability to meet its short-term liabilities with its short-term assets.

–One of the best measures of a company’s financial health
–Higher ratio: more liquidity

Question 20

Quick Ratio:

Answer 20

Similar to the current ratio, but it excludes inventory in the numerator.

–Inventory is often the least liquid asset on a firm’s balance sheet.

During periods of declining sales, firms may have difficulty selling its inventory and converting it to cash.

Question 21

Net Working Capital:

Answer 21

indicates the dollar amount of equity in the working capital position of the firm