Chapter 5

Question 1

What is fundamental analysis?

Answer 1

You study anything and everything about the economy, the industry and the company to try to determine the stock’s intrinsic or fundamental value.

Question 2

Define top-down and bottom-up approaches?

Answer 2

Top-down: the manager first analyzes the overall economy, then the sectors and finally look for specific companies in which to invest.

Bottom-up: this approach to selecting securities concentrates on the fundamentals of specific companies’ stock rather than board economic factors.

Question 3

What is the calculation for free cash flow firm (FCFF)?

Answer 3

FCFE + after-tax expense - new net borrowing

Question 4

What is economic analysis?

Answer 4

The broadest way to measure an economy is through its gross domestic product (GDP), which is the value of goods and services produced by that country.

Question 5

What is aggregate demand curve?

What is aggregate supply curve?

Answer 5

What the economy will buy at a certain price point.

What the economy will produce at a certain price point.

Question 6

What is the formula to calculate GDP?

Answer 6

= C (consumption by households)
+ I (private investment)
+ G (government purchases of goods and services)
+ X (gross exports)
- M (gross imports)

Question 7

What impacts the level of consumption (C)?

Answer 7

1. Wealth.
2. Expectations.
3. Consumer debt.
4. Taxes.

Question 8

What impacts the level of private investment (I)?

Answer 8

1. Expectations of real net profit.
2. Taxes.
3. Changes in technology.

Question 9

What impacts the level of government spending (G)?

Answer 9

1. Taxation.
2. Borrowing.
3. Printing money.

Question 10

What is the balance of trade (X-M) and what are the impacts?

Answer 10

Also called ‘net exports’

1. Foreign incomes.
2. Tariffs.
3. Exchange rates.

Question 11

What is the aggregate supply curve affected by?

Answer 11

1. Land resources.
2. Labour.
3. Capital.
4. Productivity.
5. Taxes.
6. Regulations.

Question 12

Define loose and tight monetary policy?

Answer 12

Loose monetary policy increases demand.

Tight monetary policy decreases demand.

Question 13

Out of the 20 Canadian leading indicators, 16 are reported monthly. Define the four that don’t report monthly?

Answer 13

1. National income and expenditures (GDP): quarterly.
2. Industrial capacity utilization: quarterly.
3. Gross domestic product (GDP): estimated quarterly and revised monthly.
   Federal reserve beige book: eight times a year.

Question 14

Define economic forcasting?

Answer 14

Is a prediction of the outcome of a particular economic indicator or event and it is used inside and outside of the investment industry.

Question 15

What are the four life cycle phases for an industry?

Answer 15

1. Pioneering phase.
2. Expansion phase.
3. Mature phase.
4. Declining phase.

Question 16

What is sector rotation?

Answer 16

Involves adjusting the portfolio weighting based on the results of the economic or industry analysis.

Question 17

What is the difference between IFRS and GAAP?

Answer 17

IFRS: International financial reporting standards (primarily principles-based).
GASP: Generally accepted accounting principles (primarily rules-based).

Question 18

What are the three activities on the statement of cash flows?

Answer 18

1. Financing activities.
2. Investing activities.
3. Operation activities.

Flows In / Out

Question 19

Stocks listed on the Toronto Stock Exchange (TSX) must submit?

Answer 19

Unaudited financial statements within 45 days after year end.

Audited financial statements within 90 days after year end.

Question 20

Stocks listed on the TSX Venture Exchange or Canadian Securities Exchange (CSE) must submit?

Answer 20

Unaudited financial statements within 60 days after year end.

Audited financial statements within 120 days after year end.

Question 21

What are the four categories of financial ratio?

Answer 21

List of Various Ratios.

1. Liquidity.
2. Operating.
3. Value.
4. Risk analysis.

Question 22

What falls under liquidity ratios?

Answer 22

1. Working capital ratio (current ratio).
2. Quick ratio (the acid test).

Question 23

What falls under operating performance ratios?

Answer 23

1. Gross profit margin.
2. Net profit margin.
3. Net return on common equity.
4. Inventory turnover.

Question 24

What falls under value ratios?

Answer 24

1. Earnings per common share.
2. Equity per common share.
3. Dividend yield.
4. Price-to-earnings (P/E) ratio (or multiplier.

Question 25

What falls under risk analysis ratios?

Answer 25

1. Asset coverage.
2. Debt-to-equity.
3. Cash-flow-to-total-debt.
4. Interest coverage.

Question 26

Define reserve life index (RLI)?

Answer 26

Calculates the number of years it would take to deplete a company’s reserve at the current daily production rate.

Question 27

What is the formula to calculate the debt-adjusted cash flow (DACF)?

Answer 27

Cash flow from operations + financing costs (after tax) + exploration costs (before tax) +/- changes in working capitial

Question 29

How do you calculate the Dupont ROE model?

Answer 29

Net profit margin x Total asset turnover x Financial leverage

Net profit margin = profit/revenue.
Total asset turnover = revenue/total assets.
Financial leverage = total assets/common equity

Question 30

What is the calculation of earnings per share (EPS) on a fully diluted bases?

Answer 30

EPS = profit / (ui87weighted average of outstanding common shares + outstanding convertibles)