Some fundamental multiple-choice questions derived from this chapter:
1. According to Chapter 39, what was the standard multiplier for common stocks prior to the 1927-1929 bull market?
A. 5 times earnings
B. 10 times earnings
C. 15 times earnings
D. 20 times earnings
2. Which of the following does the chapter NOT acknowledge as a role of a security analyst?
A. Establishing general rules for the "proper value" of common stocks
B. Providing conservative valuation for common stocks
C. Identifying significant factors in the balance sheet that affect earnings
D. Pointing out the importance of capitalization structure and source of income
3. What is the typical basis of valuation, as suggested in the chapter?
A. The company's projected earnings over the next five years
B. The company's average earnings over a period of one to five years
C. The company's average earnings over a period of five to ten years
D. The company's peak earnings in the past year
4. What is considered to be the maximum price for an investment-grade common stock, according to the chapter?
A. About 10 times average earnings
B. About 15 times average earnings
C. About 20 times average earnings
D. About 25 times average earnings
5. The chapter states that an investment-grade common stock should satisfy which of the following conditions?
A. Have a market price higher than 20 times average earnings
B. Be satisfactory in its financial set-up and management, and have satisfactory prospects
C. Have a stable financial position and good prospects, regardless of its market price
D. Have a high market price to ensure high returns on investment
6. What adjustment should be made when analyzing past earnings on a per-share basis?
A. Changes in the CEO's salary
B. Changes in the number of shares due to stock dividends, split-ups, or additional stock sales at low prices
C. Changes in the company's product offerings
D. Changes in the company's marketing strategy
7. The chapter categorizes companies into different groups based on certain criteria. Which of these best describes Group C companies?
A. Companies that were highly speculative during the market speculation of 1928-1929
B. Companies with unstable earnings records
C. Companies that meet specific and quantitative tests of investment quality and have a satisfactory ratio of average earnings to market price
D. Companies with high market prices that are higher than their average earnings justify
Answers: BACCB BC