CHAPTER 14—COMPANY ANALYSIS AND STOCK VALUATION
TRUE/FALSE
1. A growth company is one whose stock is undervalued by the market.
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2. A
... [Show More] cyclical company's sales and earnings are heavily influenced by aggregate business activity.
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3. A stock with low systematic risk is considered to be a defensive stock.
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4. A growth company is a firm that has the opportunities and ability to invest capital in projects that
generate rates of return greater than the firm's cost of debt.
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5. With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is
important to buyers.
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6. By definition growth companies have growth stocks.
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7. Turnarounds are firms with valuable assets that are hidden on the balance sheet.
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8. Present value of free cash flow to equity resembles the present value of earnings concept except that it
includes the capital expenditures required to maintain and grow the firm and the change in working
capital required for a growing firm.
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9. In the present value of operating free cash flow technique, the firm's operating free cash flow to the
firm is discounted at the firm's weighted average cost of capital (WACC).
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10. The best known measure of relative value for common stock is the P/E ratio.
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11. Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or
negative cash flows.
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12. The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts
contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
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13. Price-to-sales ratio is still considered the predominant firm valuation technique.
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14. The constant growth dividend growth model is not appropriate for the valuation of growth companies.
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15. A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough
during the year to cover its total cost of capital and the value of the firm has declined.
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16. While EVA is considered an internal performance measure, MVA is considered to be an external
performance measure.
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17. A defensive company is one whose sales, earnings and cash flows are strongly correlated with the
business cycle.
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18. An undervalued stock is a growth stock.
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19. An overvalued stock is a non-growth stock.
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20. A firm's competitive strategy can be either defensive or offensive.
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21. To benefit from cost leadership a firm must command prices near the industry average.
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22. Two major competitive strategies are low-cost leadership and low-price leadership.
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23. According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance
is when a firm's product is the latest craze.
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