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investments (securities) > Unit 15 > Flashcards

Unit 15 Flashcards

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SIE Exam flashcards
1
Q

Give a brief description of FUNDAMENTAL ANALYSIS

A

is the study of industries and companies to IDENTIFY the BEST PLACES TO INVEST.

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2
Q

What is an alternate name for fundamental analysis?

A

top-down analysis

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3
Q

What are CYCLICAL INDUSTRIES?

A

HIGHLY SENSITIVE to BUSINESS CYCLES and INFLATION trends.

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4
Q

What are the four classes of industries?

A

cyclical, noncyclical, countercyclical, and growth.

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5
Q

What is typically PRODUCED by CYCLICAL industries?

A

produce DURABLE GOODS, such as heavy machinery, and raw materials, such as steel and automobiles.

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6
Q

Explain deeply fundamental analysis

A

The process of EXAMINING THE ECONOMY to IDENTIFY THE INDUSTRIES that will DO WELL in the NEAR FUTURE and then the COMPANIES within those industries that are FINANCIALLY STRONG

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7
Q

What is the impact of a RECESSION on CYCLICAL INDUSTRIES?

A

the DEMAND for such products DECLINES as MANUFACTURERS postpone investments in new capital goods and CONSUMERS postpone purchases of these goods, such as automobiles.

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8
Q

What is a good way to identify if a company is a part of the CYCLICAL industry?

A

If the company PRODUCES INDUSTRIAL METALS such as steel or aluminum or MAKES STUFF from STEEL OR ALUMINUM, it is probably cyclical.

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9
Q

What is NONCYCLICAL (defensive) industries?

A

Companies in defensive industries generally produce NONDURABLE CONSUMER GOODS (sometimes called CONSUMABLES), such as food, pharmaceuticals, and tobacco.

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10
Q

Give some examples of CYCLICAL industry products

A

■ Steel

■ Autos

■ Heavy equipment

■ Capital goods (washers and dryers, etc.)

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11
Q

“least affected by normal business cycles”

What industry does this describe?

A

Noncyclical (defensive) industries

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12
Q

Why is top-down analysis an alternate name for fundamental analysis?

A

because you start at the top (the economy) and work your way down to the company.

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13
Q

What is a good way to identify if a company is noncyclical (defensive) industries?

A

If the company makes a product that is used once and consumed in the process, it is probably defensive.

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14
Q

What is a Countercyclical industry?

A

tend to turn down as the economy heats up and to rise when the economy turns down. They are producers of a product that people buy when they are scared and looking for safety.

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15
Q

What happens to STOCKS in

DEFENSIVE INDUSTRIES during a RECESSION and BEAR market

versus

during an EXPANSION and BULL market?

A

stocks in defensive industries generally DECLINE LESS than STOCKS IN OTHER INDUSTIES

but during EXPANSIONS and BULL markets, defensive stocks may ADVANCE LESS.

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16
Q

What are some examples of NONCYCLICAL (defensive) industries ?

A

■ Food

■ Utilities—highest dividend payout ratio

■ Clothing

■ Drugs

■ Tobacco

■ Liquor

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17
Q

What are some examples of COUNTERCYCLICAL industries?

A

gold mining and refinement, though any precious metal will do

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18
Q

Explain the tendency of persons in the GOLD MARKET

A

People tend to flock to gold when the economy is WEAK and move away from gold as the economy IMPROVES and investors move into investments with better return potential (and more risk).

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19
Q

Describe a growth industry

A

is one that seems to be disconnected from the business cycle, doing well regardless of the economy. This may apply to an individual stock, as well as to a specific industry.

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20
Q

Investments in this industry tend to involve less risk and, consequently, lower investment returns. What industry is this?

a. defensive industries
b. cyclical
c. growth
d. countercyclical

A

a. defensive industries

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21
Q

What is a special situation?

A

is normally applied to a specific company, but it could apply to an industry as a whole. A special situation might be anything from a hostile takeover to a cultural shift that moves the consumer away from the product.

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22
Q

What is the difference between growth and special situation?

A

Unlike growth, special situation may be a positive or a negative condition

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23
Q

Based on the scenario below is this a growth or special situation?
At the same time, companies that had historically done well producing public telephone equipment (phone booths) saw that business decrease dramatically. Also, makers of street maps are not enjoying the information revolution much either.

A

A special situation, and not a good one.

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24
Q

______________ tend to do well in expansions and poorly in contractions

A

Cyclical Industries

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25
Q

What is corporate financial reports?

A

A corporation’s financial reports provide fundamental analysts the data they need to understand the financial strengths and weaknesses of a company.

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26
Q

What can corporate financial reports be used for ?

A

From the information on these statements, we can calculate ratios that allow us to compare a company’s financials with those of a competitor.

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27
Q

What are the two primary financial reports?

A

balance sheet and the income statement

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28
Q

______________ tend to be less impacted by the business cycle, maintaining sales throughout the cycle.

A

Defensive Industries

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29
Q

How often are financial reports published?

A

are released on quarterly and annual basis

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30
Q

What is the balance sheet?

A

provides a snapshot of a company’s financial position at a specific time. It identifies the value of the company’s assets (what it owns) and its liabilities (what it owes).

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31
Q

True or False

The value of its assets must equal (balance with) the value of its liabilities and equity.

A

True

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32
Q

What is the difference between assets and liabilities called?

A

difference between these two figures is the corporation’s equity, or net worth

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33
Q

Based on the scenario below is this a growth or special situation?
In the late 1990s and into the first decade or so of the 2000s, mobile information companies (smartphones and apps) grew at a tremendous pace. Even during the Great Recession, consumers still shoveled out money to buy the newest smartphones.

A

A growth industry.

34
Q

What is a drawback of a balance sheet?

A

The balance sheet cannot tell the analyst whether the company’s business is improving or deteriorating.

The balance sheet also does not measure the profitability of a business.

35
Q

What are the components of a balance sheet?

A

Assets

Liabilities

36
Q

What are the two types of liabilities?

A

current and long-term liabilities

37
Q

Why do they call it a balance sheet?

A

First, it reflects the balances of the different accounts. Second, it was traditionally set up in two columns (as above) and the figures at the bottom of the two columns should be equal. If they’re not equal, your balance sheet doesn’t balance

38
Q

What are long term liabilities?

A

are debt that will not be paid off in the near future.

39
Q

What are current liabilities?

A

are those liabilities that are due now or in the near future (within 12 months).

40
Q

Give examples of long term liabilities

A

or a corporation, this will normally be notes and bonds.

41
Q

Give examples of current liabilities

A

would include accrued wages, accrued taxes, accounts payable, or interest payments.

42
Q

Give examples of the 3 types of assets

A

■ . Securities, accounts receivable, and the company’s inventory

■ Real estate, furniture, and equipment are all examples of fixed assets.

■ Trademarks, copyrights, reputation, and intellectual property

43
Q

What are the components of net worth?

A

■ Preferred stock
■ Common stock
■ Capital in excess of par
■ Retained earnings

44
Q

What are the 3 types of assets?

A

current assets, fixed assets, and other.

45
Q

Describe each component of net worth

A

■ Preferred stock—any funds received from the sale of preferred stock
■ Common stock—the par value of the common stock ■ Capital in excess of par—moneys received from the sale of common stock in excess of the par value
■ Retained earnings—the earnings the company has made that have not been paid out as dividends

46
Q

Name the 3 short term liquidity analysis ratios

A

Working capital
Current ratio
Acid ratio

47
Q

Describe the 3 types of assets

A

■ Current assets are cash and assets that may be easily converted to cash.

■ Fixed assets are assets that are difficult to liquidate.

■ Other assets may also be called intangibles or goodwill.

48
Q

What is working capital?

A

This figure is the amount of money that a company can spend (or lose) and remain operational.

49
Q

How is working capital calculated?

A

current assets – current liabilities = working capital (expressed as a dollar amount)

50
Q

How is current ratio calculated?

A

current assets: current liabilities = current ratio (expressed as a ratio (2:1, 1.25:1))

51
Q

______________don’t care about the economy: they just keep growing (until they don’t).

A

Growth Industries

52
Q

What is the current ratio?

A

This figure is a better figure to use when comparing the liquidity of a company

53
Q

What is acid ratio?

A

this ratio is the test of a company’s liquidity if everything really goes bad.

54
Q

How is acid ratio calculated?

A

(current assets – inventory):current liabilities = acid ratio (expressed as a ratio (0.7:1)).

55
Q

What are solvency ratios?

A

debt ratio (or debt-to-equity ratio)

56
Q

What is debt ratio?

A

It is a measure of how much of a corporation’s net worth is derived from long-term debt

57
Q

The most common measure of long-term solvency is the _____

A

debt ratio (or debt-to-equity ratio)

58
Q

______________ do better when the economy is weak and lose value when the economy strengthens.

A

Countercyclical industries

59
Q

How is debt ratio calculated ?

A

long-term debt / (long-term debt + net worth) = debt ratio (expressed as a percentage (56%. 12%))

60
Q

What is the income statement?

A

(also called a profit and loss, or P&L) summarizes a corporation’s revenues and expenses for a fiscal period—usually quarterly, year-to-date, or the full year.

61
Q

What can be inferred for a corporation with a higher than average debt ratio?

A

A corporation with a debt ratio that is higher than the industry average is said to be highly leveraged

62
Q

What are some characteristics of a income statement?

A

It compares revenue with costs and expenses during the period.

It reflects the business activity in cash flow over a specific time period.

63
Q

What is the use of an income statement ?

A

Fundamental analysts use the income statement to judge the efficiency of a company’s operation and its profitability.

64
Q

How is retained earnings calculated ?

A

earnings available to common
- common dividends
= retained earnings

65
Q

Special situations are _________________

A

situational; some specific circumstance is affecting them.

66
Q

How is earnings available to common calculated ?

A

Net income after tax
- preferred dividends
= earnings available to common

67
Q

How is operating income calculated?

A

operating profit
+non operating income
= operating income (earnings before interest and taxes)

68
Q

How is taxable income calculated ?

A 
operating income (earnings before interest and taxes) 
-interest expenses  
= taxable income (pretax income)
69
Q

In the income statement how is operating profit calculated?

A

Net Sales
- cost of goods sold (COGS)
- operating costs(including depreciation)
= operating profit

70
Q

How is net income after tax calculated ?

A

Taxable income (pretax income)
- taxes
= net income after taxes

71
Q

What is PE ratio?

A

The PE ratio is a measure of the amount of earnings a company makes compared with its current market value (CMV, or the stock’s price).

72
Q

How is PE ratio calculated?

A

CMV / EPS = PE ratio (expressed as a number)

73
Q

How is Earnings per share (EPS) calculated?

A

calculated by dividing the earnings available to the common shareholder (earnings) by the number of outstanding shares

74
Q

The ABC Corporation has earnings of 520,000,000 and has 10,000,000 outstanding shares.
It has a current market value of $32.00. Calculate EPS

A

EPS = earnings/ outstanding shares
— EPS = 20,000,000 / 10,000,000
— EPS = $2

75
Q

The ABC Corporation has earnings of 520,000,000 and has 10,000,000 outstanding shares.
It has a current market value of $32.00. Calculate P/E ratio

A

— P/E = CMV/EPS
— P/E=32 /2
— P/E = 16

76
Q 
All of the following ratios are measures of the liquidity of a corporation except 
A. acid ratio. 
B. debt-to-equity ratio. 
C. current ratio. 
D. quick ratio
A

B

77
Q 
Profits that are not distributed to shareholders are called 
A. capital surplus. 
B. dividends. 
C. retained earnings. 
D. Interest.
A

C

78
Q

ABC, with 3 million shares outstanding, reports after-tax earnings of $7.5 million. ABC stock is trading at 550 a share. The PIE ratio is A. 20. B. 25. C. 33. D. 40.

A

A

79
Q

Which of the following stocks is regarded as a defensive stock?
A. Aerospace stock
B. Stock selling close to its support level
C. Stock with a strong cash position and a low ratio of debt
D. Electric utility stock

A

D

80
Q

The economy appears to be moving into recession. Which of the following companies will likely deliver the best returns if the recession fears prove accurate? A. Southern Utah Gas and Electric
B. Seabird Airlines
C. Hinckley Gold and Silver Mining
D. Butterfly Heavy Equipment

A

C

investments (securities) (15 decks)

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