Crunch Time : Chapter 12

Question 1

What is a stop order?

Answer 1

A suspended market order

Question 2

What does a stop-limit order become once activated?

Answer 2

A limit order

Question 3

What does fundamental analysis involve?

Answer 3

Researching a company’s sales, long-term strategy, and financial statements

Question 4

What is filed with the SEC upon the occurrence of a material event?

Answer 4

A Form 8-K

Question 5

How soon must a Form 8-K be filed after a material event occurs?

Answer 5

Within four business days

Question 6

What can the income statement be used to estimate?

Answer 6

A company’s cash flows

Question 7

What do leverage ratios measure?

Answer 7

The amount of debt that a company has

Question 8

What does the debt-to-equity ratio measure?

Answer 8

The degree of leverage for a company

Question 9

What does a debt-to-equity ratio of 1.0 indicate?

Answer 9

The accounting value of a company’s liabilities and equity are equal

Question 10

How is the Price-to-Earnings (PE) Ratio calculated?

Answer 10

Stock Price ÷ Earnings Per Share (EPS)

Question 11

What is an asset’s book value?

Answer 11

The accounting value, not the market value

Question 12

What does the price-to-book ratio compare?

Answer 12

The market price of a company’s stock to the accounting value of the company

Question 13

Fill in the blank: To calculate the debt-to-equity ratio, the _______ or book value of the debt and shares may be used.

Answer 13

market value

Question 14

If a company’s PE ratio recently fell, what could have occurred?

Answer 14

Either the share price declined or EPS increased

Question 15

If a company’s PE ratio recently rose, what could have happened?

Answer 15

Either the share price increased or EPS declined

Question 16

What is the Wilshire 5000-to-GDP ratio used for?

Answer 16

To determine whether U.S. stocks are over- or under-valued

Question 17

In Modern Portfolio Theory, what is the basic measure of risk?

Answer 17

Standard deviation

Question 18

According to CAPM, what are the two specific types of risk?

Answer 18

• Diversifiable (non-systematic risk) * Non-diversifiable (systematic risk)

Question 19

What does alpha measure?

Answer 19

Non-systematic risk

Question 20

What does beta measure?

Answer 20

Systematic risk

Question 21

What is beta in relation to the stock market?

Answer 21

A stock’s covariance or correlation with the overall stock market

Question 22

What may tactical asset allocation include?

Answer 22

Sector rotation

Question 23

What do strategic investors believe about markets?

Answer 23

That markets are efficient and active investment management doesn’t produce excess risk-adjusted returns

Question 24

What are tax-adjusted returns adjusted for?

Answer 24

Taxes, but not inflation

Question 25

According to the dividend discount model, under what condition is a stock considered a good investment?

Answer 25

When its market value is less than the present value of future dividends

Question 26

What is the formula for net yield (after-tax yield)?

Answer 26

Taxable yield x (100% - tax bracket %)

Question 27

What is the formula for calculating inflation adjusted return (real return)?

Answer 27

Nominal yield – inflation rate

Question 28

How many times per year is a reporting company required to file a Form 10-Q?

Answer 28

Three times

Question 29

How often is a Form 10-K filed?

Answer 29

Annually

Question 30

To calculate the amount needed to assure payments in perpetuity, what must be done?

Answer 30

Divide the annual income desired by the rate of interest needed

Question 31

What is a measure of profitability?

Answer 31

Earnings per share (EPS)

Question 32

How is a company’s market capitalization calculated?

Answer 32

By multiplying the current market value of its stock by the number of shares outstanding

Question 33

What happens if a company purchases an asset and finances it through debt?

Answer 33

It will increase its percentage of debt capital-to-equity capital

Question 34

What does technical analysis use to make trading decisions?

Answer 34

Charts, pricing trends, and support and resistance levels

Question 35

What moving averages might a technical analyst examine?

Answer 35

* 50-day moving average * 200-day moving average

Question 36

What characteristics do value stocks have?

Answer 36

* Low P/Es * Low price-to-book ratios * High dividend payout ratios

Question 37

What characteristics do growth stocks have?

Answer 37

* High P/Es * High price-to-book ratios * Low dividend payout ratios

Question 38

What is the dividend discount model?

Answer 38

A stock valuation method that estimates future dividends and discounts them to their present value

Question 39

What formula does the dividend discount model use?

Answer 39

The same formula as the present value of a perpetuity

Question 40

What concept is covered in behavioral finance?

Answer 40

Loss aversion

Question 41

What type of index is the S&P 500?

Answer 41

A capitalization-weighted index

Question 42

What type of index is the Dow Jones Industrial Average (DJIA)?

Answer 42

A price-weighted index

Question 43

What does the MSCI EAFE index represent?

Answer 43

An index of foreign (i.e., non-U.S.) stocks

Question 44

What is the best way to calculate a fund’s annual return over several years?

Answer 44

Geometric means

Question 45

What is the formula for Total Return?

Answer 45

(Sale Price – Purchase Price + Dividends/Interest) ÷ Purchase Price

Question 46

What is the formula for Net Present Value (NPV)?

Answer 46

Discounted Value of Cash Flows – Market Price

Question 47

What does an investment’s internal rate of return (IRR) represent?

Answer 47

The return that makes the net present value (NPV) equal to zero

Question 48

What cash flows does an investment’s IRR use?

Answer 48

Only positive cash flows and negative cash flows from an investment

Question 49

If the net present value (NPV) of an investment is greater than zero, what does that indicate?

Answer 49

The investment’s current market price is less than the discounted cash flows

Question 50

If the net present value (NPV) of an investment is less than zero, what does that indicate?

Answer 50

The investment’s current market price is greater than the discounted cash flows

Question 51

What will buying investments with a positive NPV do?

Answer 51

Increase an investor’s wealth