LOS a: Explain the top-down approach, and its underlying logic, to the security valuation process.

Q1. Which of the following statements concerning security valuation is least accurate?

A)   Determining the value of a company with supernormal growth requires finding the present value of the dividends during the supernormal growth and adding that to the present value of the stock computed for the period of normal growth.

B)   A firm with an expected dividend payout ratio of 40%, a required rate of return of 12%, and a dividend growth rate of 5% has an estimated price to earnings (P/E) ratio of 5.7.

C)   The top-down valuation approach requires an assessment of industry influences on the company's value first, then stock-specific influences.

Q2. Which of the following would be assessed first in a top-down valuation approach?

A)   Industry return on equity (ROE).

B)   Industry risks.

C)   Fiscal policy.

Q3. Which of the following statements concerning security valuation is least accurate?

A)   In the investment process, the most important decision is selecting the proper valuation method.

B)   Firms with abnormally high return on equity (ROE) will probably retain a large portion of their earnings.

C)   If the current price of the security is $15 and the analyst using the dividend discount model determines a value of $10, the analyst should issue a sell recommendation.

Q4. The top-down, three-step process for analyzing the value of stock is comprised of:

A)   industry, company, and competitive analysis.

B)   macro-economic, industry, and company analysis.

C)   economic, fundamental ratio, and technical analysis.

Q5. The top-down approach of security analysis includes:

A)   economic analysis.

B)   industry analysis.

C)   All of these choices are correct.

LOS a: Explain the top-down approach, and its underlying logic, to the security valuation process. fficeffice" />

Q1. Which of the following statements concerning security valuation is least accurate?

A)   Determining the value of a company with supernormal growth requires finding the present value of the dividends during the supernormal growth and adding that to the present value of the stock computed for the period of normal growth.

B)   A firm with an expected dividend payout ratio of 40%, a required rate of return of 12%, and a dividend growth rate of 5% has an estimated price to earnings (P/E) ratio of 5.7.

C)   The top-down valuation approach requires an assessment of industry influences on the company's value first, then stock-specific influences.

Correct answer is C)

The top-down valuation approach requires an assessment of general economic conditions first, then industry influences on the company’s value, and then stock-specific influences.

Q2. Which of the following would be assessed first in a top-down valuation approach?

A)   Industry return on equity (ROE).

B)   Industry risks.

C)   Fiscal policy.

Correct answer is C)

In the top-down valuation approach, the investor should analyze macroeconomic influences first, then industry influences, and then company influences. Fiscal policy, as part of the macroeconomic landscape, should be analyzed first.

Q3. Which of the following statements concerning security valuation is least accurate?

A)   In the investment process, the most important decision is selecting the proper valuation method.

B)   Firms with abnormally high return on equity (ROE) will probably retain a large portion of their earnings.

C)   If the current price of the security is $15 and the analyst using the dividend discount model determines a value of $10, the analyst should issue a sell recommendation.

Correct answer is A)

In the investment process, the most important decision is asset allocation.

Q4. The top-down, three-step process for analyzing the value of stock is comprised of:

A)   industry, company, and competitive analysis.

B)   macro-economic, industry, and company analysis.

C)   economic, fundamental ratio, and technical analysis.

Correct answer is B)

The top-down decision process is characterized by first examining the macro-economic environment, industry environment, and then individual companies.

Q5. The top-down approach of security analysis includes:

A)   economic analysis.

B)   industry analysis.

C)   All of these choices are correct.

Correct answer is C)

Economic, industrial, and company analysis, in that order, must all be accomplished in the top-down approach.

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