Series 7 STC Fundamental Analysis (Ch. 16) Flashcards
If an adviser wants to measure a company’s short-term financial health, the adviser will be MOST interested in the:
Acid-test ratio
Debt-to-equity ratio
Earnings per share
Inventory turnover
Acid-test ratio
All of the following are a part of shareholders’ equity, EXCEPT:
Retained earnings
Interest payable
Paid-in-capital
Par value of preferred stock
Interest payable
The shareholders’ equity section of a balance sheet accounts for money that’s owed to a corporation’s common and preferred shareholders. When an investor buys either common or preferred shares from a corporation (e.g., through an IPO), the company accounts for the investment in two ways. Some of the investment goes into the par value (as determined by accountants) for the shares, while the remainder is then added to paid-in-capital. Retained earnings is often the largest part of shareholder’s equity and represents the historical earnings of the corporation. Each year, the corporation’s income will be added to retained earnings on the balance sheet. Interest payable is a short-term liability and is not found in the shareholders’ equity section of a balance sheet.
What’s the current ratio of a company that has current assets of $10, fixed assets of $20, current liabilities of $5, long-term liabilities of $5, and shareholders’ equity of $20?
5-to-1
0.5-to-1
0.25-to-1
2-to-1
2-to-1
Which of the following items is NOT included in an income statement?
Operating expenses
Revenue
Interest expense
Dividends payable
Dividends Payable
The income statement of a company includes its sales (revenues), less its operating expenses, less interest paid on its debt, which equals earnings before taxes. Taxes are then deducted to determine its net income, from which dividends may be declared. The income statement also includes non-recurring events such as the closing of a business or extraordinary items. The entry of dividends payable is found on a company’s balance sheet.
Which of the following items is NOT included in an income statement?
Goodwill
Selling and administrative expenses
Interest expense
Income taxes paid
Goodwill
The income statement of a company includes its sales (revenues), less its operating expenses (e.g., selling and administrative expenses), less interest paid on its debt, which equals earnings before taxes. Taxes are then deducted to determine its net income, from which dividends may be declared. The income statement also includes non-recurring events such as the closing of a business or extraordinary items. The amount of goodwill is found on a company’s balance sheet.
If a person is examining a balance sheet, what would she expect to see:
Income before interest and taxes
Taxes paid
The number of common shares outstanding
Capital expenditures
The number of common shares outstanding
The balance sheet contains three main categories: assets, liabilities, and net worth (stockholders’ equity). Within the net worth section, the number of common shares outstanding is found. Income before interest and taxes and taxes paid is found in the firm’s income statement. Capital expenditures are part of the statement of cash flows.
On a company’s balance sheet, what’s included in Shareholders’ Equity?
Cash dividends
Interest owed to bondholders
Operating income
Retained earnings
Retained earnings
The Shareholders’ Equity section of a balance sheet includes the cash that shareholders have paid to buy the company’s shares, as well as the cumulative earnings of company. The total cumulative income that a company has made is referred to as retained earnings and is a part of shareholders’ equity. Interest that a company owes its creditors (e.g., bondholders) is a part of liabilities. Both operating income and dividends are a part of an income statement, not a balance sheet.
What type of analysis examines a company’s earnings, dividend prospects, risks, and economic factors to determine its value?
Fundamental analysis
Technical analysis
Advance-decline ratio analysis
Trend line analysis
Fundamental analysis
Fundamental analysis examines a company’s financial reports and economic projections to determine its value. In other words, fundamental analysts study a company and its environment to estimate the current stock price. All other choices have to do with technical analysis, which studies pricing patterns and the behavior of the stock as it trades in the secondary market.
What’s the book value of an asset?
The price paid in excess of the accounting value of an asset
The market value of the company’ financial statements
The acquisition cost of an asset less depreciation or amortization
The expense on an income statement that accounts for preparing a company’ income statement and balance sheet
The acquisition cost of an asset less depreciation or amortization
The book value of an asset is the value of the asset that’s found on a company’s balance sheet (i.e., its books). Companies will initially value assets on their balance sheet at their acquisition costs (e.g., purchase price). However, as an asset ages, companies will write off (i.e., decrease) the value of their assets using a depreciation or amortization expense. As an asset’s value is depreciated, the book value will fall as well. The next time the company creates its balance sheet, its assets will be equal to the acquisition costs of the assets minus depreciation or amortization (Asset’s Book Value = Acquisition Cost - Depr./Amort.).
Which of the following choices is another way of expressing the earnings multiple?
Debt-to-equity ratio
Dividend payout ratio
Price-earnings ratio
Operating profit ratio
Price-earnings ratio
A fundamental analyst believes that:
A company’s financial statements, management, competitors, and standing in the marketplace are the best way to determine its value
At any given time, all public and non-public information about a security has already been included in a stock’s priced and that the market price accurately reflects the intrinsic value
Companies with low price-to-earnings ratios will outperform companies with high price-to-earnings ratios
Historical stock market data and trends are the best way to determine the intrinsic value
A company’s financial statements, management, competitors, and standing in the marketplace are the best way to determine its value
Fundamental analysis involves reviewing a company’s financial statements (i.e., balance sheet and income statement) to determine its financial health. A fundamental analyst will also examine a company’s management, its competitors, and its standing in the marketplace. On the other hand, technical analysts examine historical data and trends to predict the direction in which prices will move next. The strong from of the Efficient Market Hypothesis suggests that all information is reflected in the current market price of a stock. Value investors believe that companies with low price-to-earnings (PE) ratios will outperform companies with higher price-to-earnings ratios.
How is the book value of a company calculated?
Current Assets - Current Liabilities
Fixed Assets - Long-Term Liabilities
Total Assets - Total Liabilities
Current Assets - Inventory
Total Assets - Total Liabilities
Book value is calculated by taking all of a company’s assets and subtracting all of its liabilities. Notice that book value can also be referred to as total shareholders’ equity. The price-to-book ratio is a common way to identify overvalued and undervalued companies.
A company’s PE ratio has historically been 30, but it has recently dropped to 15. In this case, what has most likely happened to the company?
The earnings per share (EPS) has declined.
The price of the company’s stock has risen.
The price of the company’s stock has fallen.
The company has started paying common stock dividends.
The price of the company’s stock has fallen.
The price-to-earnings (PE) ratio is the price of a company’s stock divided by its earnings per share (EPS) (i.e., PE Ratio = Stock Price ÷ EPS). If the company’s PE ratio has fallen, this means that either the stock price has fallen or the EPS of the company has risen. Paying common shareholders a dividend doesn’t impact EPS and will most likely cause the stock’s price to rise.
For a client, the balance sheet equation is:
Total Assets - Total Liabilities = Capital Gains
Assets - Liabilities = Net Worth
Total Assets - Current Liabilities = Net Worth
Current Assets - Current Liabilities = Net Worth
Assets - Liabilities = Net Worth
