Question 1

Investors following a GARP strategy prefer stocks with higher PEG ratios.

Accepted Answer

GARP (Growth at a Reasonable Price) investors prefer stocks with lower PEG ratios, as they seek a balance between growth and value.

Question 2

In investments, "dead money" refers to past investments in assets that are recorded as retained earnings on the balance sheet.

Accepted Answer

"Dead money" refers to investments that are not generating any returns or growth, not retained earnings on the balance sheet.

Question 3

What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Accepted Answer

The answer of What is meant by "quality of earnings,"...

Question 4

When an investor buys a share of common stock the investor buys a claim of ownership. How is this claim represented on the balance sheet?

Accepted Answer

The answer of When an investor buys a share of...

Question 5

Can an investor who wants to use the approach of projected earnings and P/Es find help in Value Line?

Accepted Answer

The answer of Can an investor who wants to use...

Question 6

What is the internal (sustainable) growth rate? How is it calculated?

Accepted Answer

The answer of What is the internal (sustainable) growth rate?...

Question 7

What are "earnings surprises?" How do they affect stock prices?

Accepted Answer

The answer of What are "earnings surprises?" How do they...

Question 8

A company with a return on equity (ROE) that equals its required return on equity has a justifiable P/B equal to 1.

Accepted Answer

When a company's ROE equals its required return on equity, it means the company is generating returns exactly at the level investors expect, justifying a price-to-book (P/B) ratio of 1.

Question 9

Should an investor seek companies with low P/Es or high P/Es?

Accepted Answer

The answer of Should an investor seek companies with low...

Question 10

How could unexpected inflation affect the P/E ratio?

Accepted Answer

The answer of How could unexpected inflation affect the P/E...

Question 11

Some analysts believe that the P/E ratio of a fairly-valued company will equal its expected growth rate.

Accepted Answer

This belief is based on the PEG ratio concept, where a P/E ratio equal to the growth rate suggests the company is fairly valued.

Question 12

Do stock prices increase when companies announce earnings above the consensus forecast? Explain why or why not.

Accepted Answer

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Question 13

How accurate are professional earnings estimates? Do purely mechanical models give better results than analysts who add subjective assessment to the data?

Accepted Answer

The answer of How accurate are professional earnings estimates? Do...

Question 14

What three variables affect the P/E ratio? How does each affect it?

Accepted Answer

The answer of What three variables affect the P/E ratio?...

Question 15

In the model P/E = (D₁/E₁)/(k - g), the P/E should increase if the dividend payout ratio increases, other things the same. If the payout ratio was intentionally increased by the board of directors, other things are likely not to stay the same. What is likely to happen to the dividend growth rate and the required return?

Accepted Answer

The answer of In the model P/E = (D₁/E₁)/(k -...

Question 16

Regardless of how closely a company adheres to good accounting practices and auditors do their job, investors need to examine "Notes to the Financial Statements" on 10-K and 10-Q Reports to understand the company's financial situation.

Accepted Answer

Notes to the Financial Statements provide essential details and context that are not included in the main financial statements, helping investors understand the company's financial situation more comprehensively.

Question 17

All else the same, firms with higher net profit margins should have higher P/S ratios.

Accepted Answer

Higher net profit margins indicate that a firm is more efficient at converting sales into actual profit, which can lead to a higher price-to-sales (P/S) ratio as investors may value the firm's sales more highly due to its profitability.

Question 18

Positive earnings surprises generally outnumber negative surprises.

Accepted Answer

Historically, companies tend to manage earnings expectations and often report results that slightly exceed analysts' forecasts, leading to more positive earnings surprises.

Question 19

Other things being equal, as k rises, the P/E ratio will also rise.

Accepted Answer

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Question 20

What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?

Accepted Answer

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Quiz 15: Company Analysis