Equity (2): Securities, Industry & Company Analysis, Valuation

Question 1

the firm must pay the holder any omitted dividends before it can pay any dividends to common shareholders

Answer 1

cumulative preference shares

Question 2

Issued outside the issuer’s home country & denominated in dollars

Answer 2

Global depository receipts

Can be sponsored or unsponsored

Question 3

When book values are not stable, analysts should calculate ROE based on the _____ book value for the period.

Answer 3

average book value for unstable

Question 4

When book values are more stable, ____ book value is appropriate, when calculating ROE

Answer 4

beginning BV for stable

Question 5

A basket of listed depository receipts is best described as:

Answer 5

exchange traded fund (ETF) of Global depository receipts

Question 6

______ preference shares receive extra dividends if firm profits exceed a predetermined threshold

Answer 6

Participating

Question 7

Common stock is more risky than preferred stock and is expected to provide:

Answer 7

higher average returns

Question 8

The depository bank retains the voting rights of the equity shares of the foreign firm

Answer 8

unsponsored Depository receipt

The foreign firm and the depository bank are not in collaboration

Question 9

The type of equity depository receipt that gives its owners the right to vote and receive dividends from a company’s shares:

Answer 9

sponsored Depository Receipt

The foreign firm and the depository bank are in collaboration

Question 10

identical common shares that trade in local currencies on stock exchanges around the world

Answer 10

global registered shares

Question 11

If the currency is depreciating, investors from (inside or outside) the country will experience foreign exchange losses that decrease their returns?

Answer 11

outside the country (foreign investors investing in a depreciating currencies exchanges)

Question 12

A company’s ROE will _____ if it issues debt to repurchase outstanding shares of equity

Answer 12

increase; because it would decrease the denominator (less equity)

Question 13

conducted by investors wishing to time investment in industries through an analysis of fundamentals and/or business-cycle conditions

Answer 13

sector rotation strategy; overweighting or underweighting industries based on the current phase of the business cycle

Question 14

firms with high earnings volatility and high operating leverage

Answer 14

cyclical firms

Question 15

addresses the sources of a portfolio’s returns, usually in relation to the portfolio’s benchmark

Answer 15

portfolio performance attribution

Question 16

Industry analysis is most useful for:

Answer 16

portfolio performance attribution

Question 17

Identifying firms that derive their revenue and earnings from similar business activities

Answer 17

peer group construction;

Usually start with the commercial classification and then group based on what the business activity is

Question 18

shows how demand evolves over time as an industry passes from the embryonic stage through the stage of decline

Answer 18

industry life-cycle model (time = x axis) (demand = y axis)

Question 19

Industry members will avoid price competition in:

Answer 19

concentrated industry (few members in an industry)

Question 20

Economic profit is earned and value is created for shareholders when the industry earns returns above the company’s:

Answer 20

cost of capital

Question 21

Company with successful cost leadership strategy is characterized by:

Answer 21

low cost of capital

Question 22

include a description of the company’s business, investment activities, governance, and strengths and weaknesses

Answer 22

corporate profile

Question 23

model uses a single constant growth rate of dividends

Answer 23

Gordon growth model

Question 24

The model that is best for valuing stable and mature, non-cyclical, dividend paying firms

Answer 24

Gordon growth model

Question 25

For rapidly growing companies that expected to pay dividends that growth rapidly, slowing, or erratically over some period, and then become constant should use which model?

Answer 25

multistage growth model

Question 26

Price to earnings multiples are used for:

Answer 26

predicting stock returns; low multiples = high future returns

Question 27

the ratio most useful for when firms have different capital structures or earnings are negative

Answer 27

EV/EBITDA
EBITDA will still be positive, if earnings are negative

Question 28

Useful for firms with large portion of tangible assets that have readily available market values

Answer 28

Asset based models

Question 29

The intrinsic value of equity is based on the MV of assets - MV liabilites

Answer 29

asset based models

Question 30

Measure of a firm’s dividend paying capacity

Answer 30

Free cash flow to equity (discount model)

Question 31

In the Gordon growth model, r must be

Answer 31

required return > growth rate

Question 32

Growth companies transitioning to the mature stage would use which model?

Answer 32

2-stage DDM

Question 33

Young companies entering the growth phase would use which model?

Answer 33

3-stage DDM

Question 34

Valuation technique most approprite for valuing shares of a firm that does not pay dividends:

Answer 34

Free cash flow model

Question 35

The total value of a firm’s outstanding equity shares based on market prices and reflects the expectations of investors on future performance

Answer 35

Market Value of equity

Question 36

In this stage, an industry is characterized by:
* increasing profitability
* decreasing prices
* low degree of competition among competitors
* Rapid demand

Answer 36

Growth stage

Question 37

In this stage, an industry is characterized by:
* Slower growth
* industry overcapacity
* intenense competition
* protitable, but declining

Answer 37

Shakeout phase

Question 38

In this stage, an industry is characterized by:
* litte/no growth
* stable pricing
* industry consolidation
* high barriers to entry
* efficient cost structure

Answer 38

Mature phase

Question 39

In this industry life cycle, firms are focused on extending product lines, rather than creating new ones; resulting in:
* Efficiency gains
* Increased market share with superiod products

Answer 39

Growth phase

Question 40

In this stage, an industry is characterized by:
* Negative growth
* Higher production costs, as demand falls

Answer 40

Decline stage

Question 41

In this stage, an industry is characterized by:
* slow growth
* high prices
* high risk

Answer 41

Embryonic phase

Question 42

A company that is required to raise equity capital to continue to operate as a going concern is most likely doing so to:

Answer 42

improve capital adequacy ratios

In cases in which a company must raise capital to ensure it can continue to operate as a going concern, capital is most likely raised to fulfill regulatory requirements, improve capital adequacy ratios, or ensure that debt covenants are met

Question 43

An increase in the dividend payout ratio will most likely increase the intrinsic value when using a(n):

Answer 43

Present value model

An increase in the dividend payout ratio will increase the cash expected to be distributed to shareholders. The dividend discount model is the present value of the cash expected to be distributed to shareholders. Therefore an increase in the dividend payout ratio will increase the intrinsic value in a present value model