Chapter 13: Portfolio and Securities Analysis

Question 1

Balance sheet formula

Answer 1

Assets = liabilities + stockholders equity

Question 2

Calculate working capital

Answer 2

Working capital = current assets - current liabilities

Question 3

Calculate net worth

Answer 3

Net worth = assets - liabilities

Question 4

Calculate P/E ratio

Answer 4

Market Price / EPS

Question 5

Tight money yield curve indicates

Answer 5

-Interest rates have recently increased -Short term bonds are yielding more than long term bonds

Question 6

What is the formula for earnings per share?

Answer 6

(Net income - preferred dividends) / # of common shares outstanding

Question 7

Head and shoulders and Inverted head and shoulders

Answer 7

Top formation = reversal of a bullish trend, becuase trends downward Inverted = reversal of a bearish trend, because trends upward

Question 8

What is Consolidation?

Answer 8

-When a stock stays within a narrow trading range or trading channel -When a stock stays within a narrow range for a long period of time it creates a support and resistance level

Question 9

Support

Answer 9

Bottom of the trading range

Question 10

Resistance Level

Answer 10

Top of the trading range

Question 11

Saucer and Inverted saucer

Answer 11

-Saucer = gradually decreasing and then gradually increasing. Bullish. -Inverted Saucer = gradually increasing and then gradually decreasing. Bearish

Question 12

ABC is in the process of buying a new $50,000 computer system. If it is paying for the system with available cash, what is the effect on the balance sheet?

• A. the net worth decreases and the working capital remains the same
• B. the net worth remains the same and the working capital remains the same
• C. the net worth decreases and the working capital decreases
• D. the net worth remains the same and the working capital decreases

Answer 12

D. the net worth remains the same and the working capital decreases

• The company is exchanging one asset for another, and the overall liabilities remain the same, so the net worth of the company doesn’t change.
• However, the company is using a current asset (cash) to purchase a fixed asset (the computer system), so the working capital (the amount of money the company has to work with) decreases:
  
  • Net worth = assets - liabilities
  • working capital = current assets - current liabilites

Question 13

ABC has 1 million common shares outstanding. If ABC’s net income is $14 million, what are the earnings per share?

• A. $0.07
• B. $0.70
• C. $14.00
• D. cannot be determined

Answer 13

C. $14.00

• EPS = (net income - preferred dividends) / number of common shares outstanding
• EPS = $14,000,000 - 0 / 1,000,000 = $14.00

Question 14

During a period of tight money, when the yield curve is inverted, which of the following securities is likely to have the highest yield?

• A. T-bills
• B. commercial paper
• C. T-notes
• D. AA-rated corporate bonds

Answer 14

B. commercial paper

• Because you are dealing with an inverted yield curve and tight money, short term debt securities have higher yields than long term debt securities.
• The two short term securities are T-bills and commercial paper.
• But T-bills are issued by the federal government and are considered very safe, therefore they would be expected to have a lower yield.

Question 15

Which of the following types of preferred stock allows the investor to reduce inflation risk?

A. cumulative

B. noncumulative

C. convertible

D. participating

Answer 15

C. convertible

Question 16

According to the US Department of Commerce, the following are defined as:

1. Recession
2. Depression

Answer 16

1. a decline in the real output of goods and services (GDP) for 6 months or more
2. a severe downturn lasting 18 months (6 quarters) or more with unemployment rates greater than 15%

Question 17

The market is said to be ________ if a market index such as the DJIA or the S&P 500 is declining but fewer stocks are declining than advancing. If the market is showing this behavior, it is likely a good time to buy.

Answer 17

Oversold

Question 18

If the market is ________ if market indexes such as the DJIA or the S&P 500 is increasing but fewer stocks are advancing than declining. Likely a good time to sell or sell short.

Answer 18

Overbought

Question 19

________ is the amount of money a company has to work with right now. It is current assets - current liabilities.

Answer 19

Working capital