Reading 56: An Introduction to Security Valuation LOSa习题精 2010, concerning, statements, following, valuation

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Session 14: Equity: Industry and Company Analysis
Reading 56: An Introduction to Security Valuation

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

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.

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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.

 

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

A) Fiscal policy.

B) Industry return on equity (ROE).

C) Industry risks.

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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.

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

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

B) 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.

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

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

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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.

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

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The top-down approach of security analysis includes:

A) Both of these choices are correct.

B) economic analysis.

C) industry analysis.

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

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Which of the following is NOT one of the three steps in the top-down approach to security valuation?

A) Market analysis.

B) Company analysis.

C) Product analysis.

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Both remaining choices comprise the steps of the top-down approach, or fundamental analysis.

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In the top-down approach to valuation, industry analysis should be conducted before company analysis because:

A) most valuation models recommend the use of industry-wide average required returns, rather than individual returns.

B) the goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest P/E ratios.

C) an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform.

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In general, an industry’s prospects within the global business environment determine how well or poorly individual firms in the industry do. Thus, industry analysis should precede company analysis. The goal is to find the best companies in the most promising industries; even the best company in a weak industry is not likely to perform well.

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Deciding how to allocate investment funds, first among countries, and then within countries to various asset classes, is the objective of which step of the top-down valuation approach?

A) Sector analysis.

B) Analysis of general economic influences.

C) Analysis of industry influences.

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The objective of step one, economic analysis, is to allocate your portfolio among countries and asset classes based on your analysis of future economic conditions.

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Which of the following is NOT typically regarded as a component of the risk premium portion of the required rate of return “k”?

A) Country risk.

B) Exchange rate risk.

C) Inflation risk.

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The risk premium can be broken down into internal and external factors:

• Internal sources of risk (diversifiable): business risk, financial risk, liquidity risk, exchange-rate risk, and country risk.
• External sources of risk: market risk (non-diversifiable).

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Which of the following would NOT be a reason for market, industry, and company analysis?

A) The market is generally a very important component of security returns.

B) Firms within a given industry perform differently.

C) Single industries perform consistently over time.

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The second step in the top-down, three-step valuation process is to identify those industries that will prosper or suffer during the time frame of your economic forecast.  You should consider the cyclical nature of the industry under study.  Some industries are cyclical, some are contra-cyclical and some are non-cyclical.  Finally, your analysis should also account for foreign economic shifts.  In general, an industry’s prospects within the global business environment determine how well or poorly individual firms in the industry do.  Thus, industry analysis should precede company analysis.