Fundamental Analysis on the Series 7 Exam - dummies

By Steven M. Rice

Fundamental analysts examine the specifics of corporations and are responsible for doing the research and recommending which securities the registered reps should promote. As a registered rep, you’ll also be responsible for examining your customers’ portfolios to help them keep in line with their investment objectives.

Practice questions

  1. Which of the following is NOT considered a quick asset?

    A. inventory

    B. accounts receivable

    C. marketable securities

    D. cash

    Answer: A. inventory

    Current assets (assets convertible into cash within a one-year period) include inventory, marketable securities held by the corporation, cash, and so on. However, when dealing with quick assets, you have to take inventory out of the equation. Quick assets are convertible into cash within a three- to five-month period. In most cases, inventory takes longer to sell than three to five months.

  2. Cash flow equals

    A. net income – depreciation

    B. gross income + depreciation + depletion

    C. net income + depreciation + depletion

    D. gross income – depletion + depreciation

    Answer: C. net income + depreciation + depletion

    Cash flow helps measure the financial health of a company. Cash flow is determined by taking the net income (after-tax income) and adding back in the depreciation and depletion deductions (if any). You need to add depreciation and depletion back in because they’re write-offs for a company but aren’t out-of-pocket expenses. So the equation looks like this:

    Cash flow = net income + depreciation + depletion

  3. PE ratio equals

    A. the market price divided by the earnings per share

    B. annual dividends per common share divided by the market price

    C. annual dividends per common share divided by earnings per share

    D. net income minus preferred dividends divided by the number of common shares outstanding

    Answer: A. the market price divided by the earnings per share

    The PE ratio is a tool that technical analysts use to help determine whether a stock is overpriced or underpriced. Typically, they’ll compare the PE ratios of several different companies within the same industry to see whether there’s a good investment opportunity. Actually, the lower the PE ratio, the better. A company with a low PE ratio means that the earnings per share (EPS) are high compared to its price. The equation for PE ratio is