1.

What conclusion can a technical analyst make about the level of a stock price if the analyst identifies a strong demand for the stock
while the supply is low?
A.
At a stagnating level.
B.
At a resistance level.
Good choice!
C.
At a support level.
D.
At a downswing level.
Feedback: A support level is the price at which the majority of investors start sensing value, and therefore are willing to buy
(demand is strong) and the majority of existing holders (or potential short sellers) are not willing to sell. As demand begins to exceed
supply, prices tend to rise above support levels.
Reference | Chapter 13: Fundamental and Technical Analysis
2.
Koine’s trading philosophy is to buy stocks when most people are selling and sell stocks when most people are buying. What type of
investor is Koine?
A.
Institutional.
Good choice!
B.
Contrarian.
C.
Accredited.
D.
Passive.
Feedback: Contrarian investors use sentiment indicators to determine what the majority of investors expect prices to do in the
future, because contrarians move in the opposite direction from the majority. For example, the contrarian believes that if the vast
majority of investors expect prices to rise, then there is probably not enough buying power left to push the prices much higher.
Reference | Chapter 13: Fundamental and Technical Analysis
3.
What price pattern indicates a sell signal to a technical analyst?
A.
Price breaks through the moving average from below on light volume.
Good choice!
B.
Price breaks through the moving average from above on heavy volume.
C.
Price breaks through the moving average from above on light volume.
D.
Price breaks through the moving average from below on heavy volume.
Feedback: If price breaks through the moving average line from above on heavy volume, and the moving average line itself starts to
fall, the upward trend is reversed. This is a sell signal.
Reference | Chapter 13: Fundamental and Technical Analysis
4.
What might force the Bank of Canada to increase short-term interest rates?
A.
Unexpected decline in Canadian GDP due to unexpected decline in Canada's current account deficit.
Good choice!
B.
Rapid increase in long-term bond yields due to increase in inflation expectations.
C.
Rapidly appreciating Canadian dollar due to sharp increase in commodity prices.
D.
Sudden increase in dividend yield on the S&P/TSX Composite due to increase in dividend payments.
Feedback: When economic growth begins to accelerate, bond yields tend to rise. If inflation begins to rise during an expansion, the
Bank most often raises short-term interest rates to slow economic growth and contain inflationary pressures.
Reference | Chapter 13: Fundamental and Technical Analysis
5.
What investment theory does Grieg follow if he believes that at any point in time a stock's price is an unbiased reflection of all
available information and represents the best estimate of the stock's true value?
A.
Rational Expectations Hypothesis.
B.
Capital Market Theory.
C.
Random Walk Theory.
Good choice!
D.
Efficient Market Hypothesis.
Feedback: The Random Walk Theory essentially assumes that price changes are random and bear no relation to previous price
changes. The Rational Expectations Hypothesis assumes that people are rational and make intelligent economic decisions after
weighing all available information. The Efficient Market Hypothesis assumes that markets are so efficient in their distribution of
information that stock prices reflect all possible information that could be considered in a buying decision. Whether these theories
are useful or accurate is unknown.
Reference | Chapter 13: Fundamental and Technical Analysis
6.
What is the historical relationship that has been observed between the Price-Earning (P/E) levels of stocks and the rate of inflation?
A.
P/E levels have shown a linear relationship to inflation rates.
B.
P/E rates have shown little relationship with inflation rates.
The correct answer is:
C.
P/E levels have been inversely related to the rate of inflation.
You chose:
D.
P/E levels have been positively related to the rate of inflation.
Feedback: An inverse relationship exists between the rate of inflation and a corporation’s price-earnings multiples. When inflation
rises, the value of future cash flows paid by the corporation will fall. Therefore, if inflation is rising, an investor is more likely to pay a
lower price for the earnings of the company.
Reference | Chapter 13: Fundamental and Technical Analysis
7.
What is a characteristic of a prolonged period of inflation?
A.
P/E levels remaining flat.
B.
Businesses experiencing higher corporate profits.
C.
Short-term interest rates likely falling.
Good choice!
D.
Manufacturers experiencing higher labour costs.
Feedback: Inflation leads to higher inventory and labour costs for manufacturers. To maintain their profitability, manufacturers pass
costs on to consumers in the form of higher prices. These higher costs are then passed on to consumers in the form of higher prices.
But higher costs cannot be passed on indefinitely; buyer resistance eventually develops. The resulting squeeze on corporate profits is
reflected in lower common share prices. Inflation causes widespread uncertainty and lack of confidence in the future. These factors
lead to higher interest rates, lower corporate profits, and lower price-to-earnings ratios.
Reference | Chapter 13: Fundamental and Technical Analysis
8.
What type of industry are each of Industry X, Y and Z based on the following information?
Two-Year Average
Growth in Return on Two-Year Average
Industry Equity (ROE) Dividend Yield
X 15% 1%
Y -5% 0%
Z 6% 4%
A.
X is an emerging industry, Y is a mature industry, Z is a growth industry.
B.
X is an emerging industry, Y is a growth industry, Z is a mature industry.
Good choice!
C.
X is a growth industry, Y is an emerging industry, Z is a mature industry.
D.
X is a mature industry, Y is a growth industry, Z is an emerging industry.
Feedback: The average growth in ROE for companies in an emerging industry is usually lower than that of companies in a mature
industry, which in turn is usually lower than that of companies in a growth industry. Similarly, the average dividend yield for
companies in an emerging industry is usually lower than that of companies in a growth industry, which in turn is usually lower than
that of companies in a mature industry.
Reference | Chapter 13: Fundamental and Technical Analysis
9.
What would be the most appropriate equity investment if an investor felt that the economy was at the peak of the business cycle
and expected equity prices to decline?
A.
Capital goods stocks.
B.
Forest products and mining stocks.
C.
Retail merchandising stocks.
Good choice!
D.
Bank and utility stocks.
Feedback: The term cyclical industry is reserved for industries in which the effect on earnings is most pronounced during a downturn
in the business cycle. During periods when stock prices are declining, cyclical stocks (forest products, mining, capital goods, retail
merchandising, etc.) fall faster than average. Defensive stocks, such as banks and utilities, fall relatively slower on average.
Therefore, if an investor is anticipating an economic contraction, her portfolio should shift to more defensive stocks.
Reference | Chapter 13: Fundamental and Technical Analysis
10.
How would you describe an industry whose earnings tend to rebound dramatically as business conditions improve?
A.
Speculative.
B.
Mature.
Good choice!
C.
Cyclical.
D.
Defensive.
Feedback: Industries can be broadly classified according how they react to the cyclical nature of the economy. Three typical
classifications are cyclical, defensive, and speculative. Mature is a term used when classifying companies by their stage of growth.
Defensive industries tend to be fairly stable, and do not react significantly to changes in business conditions. Speculative industries
tend to be driven more by their own performance, separate from general business conditions. These kinds of companies may
succeed or fail spectacularly regardless of the economic environment. Cyclical industries tend to move most significantly as changes
in the business cycle occur.
Reference | Chapter 13: Fundamental and Technical Analysis
11.
Raj is considering investing $12,000 in the diamond-mining industry and has narrowed his choice to 2 companies - Company W and
Company J, who have similar prospects. Which company should Raj invest in and why?
Earnings
per Share Current Market
(in last 12 months) Price
Company W $3.00 $36.00
Company J $2.59 $28.50
A.
Company W since its price-earnings (P/E) ratio of 12:1 is higher than that of Company J.
Good choice!
B.
Company J as its price-earnings (P/E) ratio of 11:1 is lower than that of Company W.
C.
Company J as its price-earnings (P/E) ratio of 9.09:1 is higher than that of Company W.
D.
Company W since its price-earnings (P/E) ratio of 8.33:1 is lower than that of Company J.
Feedback:
price-earnings ratio = current market price of common
earnings per share
price-earnings ratio, Company W = $36.00 = 12:1
$3.00
price-earnings ratio, Company J = $28.50 = 11:1
$2.59
If the 2 companies have similar prospects, Raj should select the company with the lower price-earnings ratio, in this case Company J.
Reference | Chapter 14: Company Analysis
12.
What factors are used to estimate the dividend possibilities of a stock?
1. Company's stability of profit over a period of years.
2. Company's current stock price.
3. Company's working capital.
4. Company's market capitalization.
Good choice!
A.
1 and 3.
B.
1 and 2.
C.
3 and 4.
D.
2 and 4.
Feedback: When estimating the dividend possibilities of a stock, directors may take the following factors into account:
 The amount of profit for the current fiscal year
 The stability of profit over a period of years
 The amount of retained earnings and the rate of return on those earnings
 The company’s working capital
Reference | Chapter 14: Company Analysis
13.
ABC issues new common shares to help pay down long-term debt. What ratio will be affected immediately?
A.
Inventory turnover.
B.
Net profit margin.
C.
Current ratio.
Good choice!
D.
Earnings per share (EPS).
Feedback: The earnings per common share (EPS) ratio shows the earnings available to each common share and is an important
element in judging an appropriate market price for buying or selling common stock. A rising trend in EPS has favourable implications
for the price of a stock. An increase in the number of common shares available will dilute the earnings available for each share, and
this will have a direct impact on the EPS.
Reference | Chapter 14: Company Analysis
14.
What is the criteria for making meaningful price-earnings ratio (P/E) comparisons between two different firms?
Good choice!
A.
Firms should be in a similar or same industry.
B.
Firms should have similar inventory turnover ratios.
C.
Firms should have similar dividend payout ratios.
D.
Firms should have similar debt/equity ratios.
Feedback: To compare the P/E ratio for one company’s common shares with that of other companies, the companies should usually
be in the same industry.
Reference | Chapter 14: Company Analysis
15.
A trend analysis of a company's earnings per share (EPS) shows that the trend value in the fifth year is 150. If the company's EPS in
the fifth year was $1.96, what was the company's EPS in the first year?
A.
$0.98.
B.
$3.92.
C.
$2.94.
Good choice!
D.
$1.31.
Feedback: The EPS in the first year is found by dividing the value in the fifth year by the trend value in the fifth year, and multiplying
the result by 100. In this case, EPS in the first year is equal to ($1.96 / 150) × 100 = $1.31.
Reference | Chapter 14: Company Analysis
16.
What is the likely impact on a company’s risk analysis ratios if the company issues additional common shares?
Good choice!
A.
Debt/equity ratio will decrease.
B.
Cash flow/debt will improve significantly.
C.
Interest coverage will decrease.
D.
Debt/equity ratio will increase.
Feedback: The debt-to-equity ratio shows the proportion of borrowed funds used relative to the investments made by shareholders
in the company. If the ratio is too high, it may indicate that a company has borrowed excessively, which increases its financial risk.
The ratio is “Total Debt Outstanding, divided by Equity”. When a company issues additional common shares it increases equity,
which in turn will decrease the debt-to-equity ratio.
Reference | Chapter 14: Company Analysis
17.
Company A and Company B are both industrial companies that operate in the same industry and have similar prospects. Company A
has a price-earnings Ratio (P/E) of 20, Company B has a P/E of 36, and the industry P/E is 28. Based on these criteria alone, which
company offers greater value to investors and why?
Good choice!
A.
Company A because it has the lower P/E.
B.
Company A or B because P/E is not a measure of market value.
C.
Company B because it has the higher P/E.
D.
Company B because its P/E is above the industry P/E.
Feedback: There is no generally accepted level or rule of thumb for the P/E ratio - it varies between industries and over the business
cycle. Companies in the same industry and with similar prospects should have approximately the same P/E. Company A offers
greater value to investors because its P/E is lower than company B's. This means that investors are paying a lower price for the
earnings for Company A as compared to Company B.
Reference | Chapter 14: Company Analysis
18.
What is the return on common equity for Company ABC if it has a profit of $2,000,000 and a total equity of $25,000,000, up from
$1,000,000 in profits and total equity of $15,000,000 in the immediately previous year?
Good choice!
A.
8.0%.
B.
4.0%.
C.
10.0%.
D.
13.3%.
Feedback: Return on total equity is calculated using the following formula: Profit/Total equity x 100. In this example, $2,000,000 /
$25,000,000 x 100 = 8%. The performance of the previous year is not relevant to the calculation.
Reference | Chapter 14: Company Analysis
19.
Samar has calculated a price for ABC, using the Dividend Discount Model (DDM), of $28.25. Interest rates rise sharply, and ABC cuts
its dividend. What is the effect on the DDM calculation and why?
A.
Price will rise, as rising interest rates and dividend reduction increase the DDM-calculated price.
Good choice!
B.
Price will fall, as rising interest rates and dividend reduction reduce the DDM-calculated price.
C.
Price will remain constant, as interest and dividend are not factors in the DDM calculation.
D.
Price will remain constant, as interest and dividend rates offset each other in the DDM calculation.
Feedback: The Dividend Discount Model illustrates in a very simple way how companies with stable growth are theoretically priced.
The formula is Price = Div1 / (r-g). Div1 is the expected dividend paid out by the company in one year, r is the required rate of return
on investments, and g is the assumed constant growth rate for dividends. As the expected dividend falls in the numerator and as the
denominator increases, the expected stock price will fall. Rising interest rates tend to lead to falling equity prices, and you would not
be willing to pay as much for a company after it has reduced its dividend as you would have been willing to pay before it reduced its
dividend.
Reference | Chapter 14: Company Analysis
20.
XYZ Limited is expected to pay a $1.50 dividend next year. The company anticipates a consistent long-term growth rate of 5.5% and
investors believe that a required return of 8.25% on XYZ is suitable. Using the Dividend Discount Model (DDM), what is the intrinsic
value of XYZ shares?
Good choice!
A.
$54.55.
B.
$10.91.
C.
$18.18.
D.
$57.55.
Feedback: The Dividend Discount Model illustrates in a very simple way how companies with stable growth are theoretically priced.
The formula is Price = Div1 / (r-g). Div1 is the expected dividend paid out by the company in one year, r is the required rate of return
on investments, and g is the assumed constant growth rate for dividends. Therefore, the price or intrinsic value of XYZ = $1.50 /
(0.0825 - 0.055) which equals $54.55.
Reference | Chapter 14: Company Analysis