Cyclical Companies Chapter 33 Verified Test Bank

Chapter: Chapter 33: Cyclical Companies

Multiple Choice

1. Which of the following are true concerning the properties of consensus earnings forecasts for cyclical companies?

I. They account for the cyclical nature of the firm.

II. Discounted cash flow (DCF) models are usually consistent with the facts.

III. The forecasts usually show an upward-sloping trend.

IV. The earnings and cash flow projections of the market are consistent with company performance.

a) I and II only.

b) I and III only.

c) II and III only.

d) II and IV only.

Response: []

2. Which of the following is most accurate concerning predicting cycles and inflection points?

a) It is easy to predict both cycles and their inflection points.

b) It is easy to predict cycles, but it is difficult to predict inflection points.

c) It is difficult to predict cycles and more difficult to predict their inflection points.

d) It is hard to predict cycles, but once in a cycle, the inflection points are easy to predict.

Response: []

3. According to simulations of the prices of cyclical stocks, which of the following seems to best characterize how analysts appear to make forecasts?

a) Analysts make naive, random-walk forecasts, which are not very accurate.

b) Analysts naively make forecasts based on the extrapolation of recent trends.

c) Analysts make forecasts based on the assumptions that historical cycles will repeat as they have in the past.

d) Analysts make forecasts based on a 50/50 chance the firm will exhibit past cyclicality or break into a new trend.

Response: []

4. Given the following list of patterns of expenditure timing, indicate the correct ordering of their resulting internal rates of return (IRRs) from lowest to highest.

I. Typical spending pattern.

II. Spending evenly over cycle.

III. Optimally timed asset purchases.

IV. Optimally timed capital spending.

a) I, II, III, IV.

b) II, I, IV, III.

c) II, I, III, IV.

d) I, II, IV, III.

Response: []

5. According to the empirical evidence, which of the following is most accurate concerning the relative importance of demand and supply in determining cyclical profitability?

a) Fluctuations in customer demand and producer supply are not important.

b) Fluctuations in customer demand are more important than fluctuations in producer supply.

c) Fluctuations in producer supply are more important than fluctuations in customer demand.

d) Fluctuations in customer demand and producer supply are equally important.

Response: []

True/False

6. The discounted cash flow (DCF) valuations of companies with cyclical earnings tend to be more volatile than those of less cyclical companies. But their share prices are much more stable.

Response: [The share prices of companies with cyclical earnings tend to be more volatile than those of less cyclical companies. But their discounted cash flow (DCF) valuations are much more stable.]

7. A pessimistic forecast from an analyst may damage the relationships of the analyst with both the managers of the analyzed firm and the analyst’s employer.

Response: []

8. A cyclical company is one whose earnings demonstrate a repeating pattern of significant increases and decreases, and the historical performance must be assessed in the context of the cycle.

Response: []

Short Answer

9. The four-step approach for valuing cyclical companies requires a minimum of two scenarios. If an analyst is using only two scenarios, how should they be constructed?

The other scenario is the new trend line scenario based on the recent performance of the company. The primary focus should be on the long-term trend line, because it will have the largest impact on value. There is less emphasis on modeling future cyclicality except to the extent it can have an impact on financial solvency.]