a company that has periods of high activity and high profits followed by periods of low activity and low profits: The recent recovery has led to increased interest in shares of cyclical companies whose performance tends to track that of the overall economy..
107.
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Define defensive companies.
a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns. Defensive companies tend to make products or services that are essential to consumers. These products are likely to be purchased whether the economy is booming or in a recession.
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108.
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How does financial leverage affect the sensitivity of profits to the business cycle?
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109.
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How does operating leverage affect the sensitivity of profits to the business cycle?
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110.
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Define peak business cycle.
occurs when economic activity reaches its highest point and begins to slow down or turn down. The contraction phase begins when economic activity starts to fall, or economic growth becomes negative.
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111.
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Define contraction business cycle. is a period when economic output declines. During this phase, the economy is producing fewer goods and services than it did before. When fewer goods and services are produced, fewer resources are used by firms—including labor.
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112.
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Define expansion business cycle. is the phase of the business cycle where real GDP grows for two or more consecutive quarters, moving from a trough to a peak.
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113.
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What is typically true of corporate dividend payout rates in the early stages of an industry life cycle? Why does this make sense?
Usually the companies tend to pay less in dividend in their early years. This makes sense as they need to save these funds to reinvest in order to grow.
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114.
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What monetary and fiscal policies might be prescribed for an economy in a deep recession?
Expansionary monetary policy to stimulate expenditure on consumer durables.
Expansionary fiscal policy i.e. lower taxes and higher government spending to stimulate demand.
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115.
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If you believe the U.S. dollar is about to depreciate more dramatically than do other investors, what will be your stance on investments in U.S. auto producers?
A depreciation in the dollar would make the imported car very expensive while the indigenous cars affordable. Such a situation is likely to benefit US auto producers. Hence investment in auto producers should be attractive.
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116.
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According to supply-side economists, what will be the long-run impact on prices of a reduction in income tax rates?
It will make workers work for current or lower wages.
According to supply-side economists, such a reduction will make workers work for current or lower wages. This should mitigate the pressure on the inflation rate.
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117.
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If IBX’s current market price is equal to this intrinsic value, what is next year’s expected price?
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118.
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In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?
To value the stock of growing companies that do not pay dividends.
It can theoretically be chosen to value the stock of growing companies that do not pay dividends. This is done by valuing them in more distant future. Practically, however such a measure is always inaccurate, hence free cash flow models are used.
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119.
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In what circumstances is it most important to use multistage dividend discount models rather than constant-growth models?
It is most important to use multi-stage dividend discount models when valuing companies with temporarily high growth rates. These companies tend to be companies in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are less numerous so that growth rates slow.
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120.
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If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?
If intrinsic value = price, the market capitalization = expected rate of return.
If intrinsic value > Price, the market capitalization rate > expected rate of return
While the investor’s individual assessment is known as intrinsic value of a stock, market consensus on its expected rate of return is called market capitalization. If the former is equal to price, the latter is also expected to be equal to the expected rate of return. But if the intrinsic value > Price, the expected rate of return is greater than market capitalization rate.
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121.
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What is the book value of securities?
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122.
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Define the liquidation value?
Liquidation value is the net value of a company's physical assets if it were to go out of business and the assets sold. The liquidation value is the value of company real estate, fixtures, equipment, and inventory. Intangible assets are excluded from a company's liquidation value
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123.
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What is Tobin’s q and what it shows?
Tobin's q predicted that when inflation goes up and borrowing costs remain low, capital will rise, resulting in increased aggregate demand. Stock price increases will improve customer wealth, resulting in greater spending and inflationary pressures.
Tobin is the one to describe the relationship between economic growth and expenditure, and his reasoning is known as Tobin's . Considering Tobin's and the impact of affluence on expansionary monetary policy, we have a consistent condition. Given low-interest rates and higher stock values, Tobin's predicted that capital would rise, resulting in increased aggregate demand.
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124.
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What is intrinsic value and how it is identified?
Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model. Intrinsic value is different from the current market price of an asset. However, comparing it to that current price can give investors an idea of whether the asset is undervalued or overvalued.
Financial analysis uses cash flow to determine the intrinsic, or underlying, value of a company or stock. In options pricing, intrinsic value is the difference between the strike price of the option and the current market price of the underlying asset
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125.
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What type of dividend discount models are used to value a stock?
The dividend discount model (DDM) is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value. It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.
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126.
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When is constant-growth model applicable?
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127.
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Define dividend payout ratio.
The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders via dividends. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. It is sometimes simply referred to as simply the payout ratio.
Dividend payout ratio= dividend paid/ net income
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128.
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What does price-to-book ratio represent to investors?
Companies use the price-to-book ratio (P/B ratio) to compare a firm's market capitalization to its book value. It's calculated by dividing the company's stock price per share by its book value per share (BVPS). The price-to-book ratio is often used by value investors looking for stocks that are underpriced by the market.
An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation.
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129.
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What does price-to-sales ratio represent to investors?
The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value that financial markets have placed on each dollar of a company’s sales or revenues.
KEY TAKEAWAYS
The price-to-sales (P/S) ratio shows how much investors are willing to pay per dollar of sales for a stock.
The P/S ratio is calculated by dividing the stock price by the underlying company's sales per share.
A low ratio could imply the stock is undervalued, while a ratio that is higher-than-average could indicate that the stock is overvalued.
One of the downsides of the P/S ratio is that it doesn’t take into account whether the company makes any earnings or whether it will ever make earnings.
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130.
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What does price-to-cash-flow ratio represent to investors?
The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow (OCF), which adds back non-cash expenses such as depreciation and amortization to net income.
P/CF is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.
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131.
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Explain the difference between LIFO and FIFO
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132.
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What are the major financial statements?
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity.
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133.
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What information does income statement include?
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