Question 1

Free cash flow represents money left after all the bills are paid and dividend payments are made.

Accepted Answer

Free cash flow represents the amount of cash generated by a company after accounting for capital expenditures and other cash payments. It is the money left over after paying all expenses and making necessary investments, including dividend payments.

Question 2

The auditor's report guarantees the accuracy of the earnings reported in the financial statements.

Accepted Answer

The auditor's report does not guarantee the accuracy of the earnings reported in the financial statements. The report provides reasonable assurance that the financial statements are free from material misstatement and are presented fairly, but it does not guarantee their accuracy.

Question 3

Leverage can magnify returns to the stockholders but also increase potential losses to the stockholders.

Accepted Answer

Leverage refers to using borrowed money to make investments or purchases. This can increase the potential returns to stockholders because they are able to invest more money than they actually have. However, if the investment does not perform well or there are losses, the stockholders may be responsible for repaying the borrowed funds, resulting in increased losses. Therefore, leverage can magnify both potential returns and losses.

Question 4

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

Accepted Answer

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Question 5

Some companies,for example Apple,tend to provide low guidance,contributing toward consistently positive earnings surprises.

Accepted Answer

Some companies, including Apple, are known for providing intentionally low guidance in order to exceed expectations and deliver consistently positive earnings surprises.

Question 6

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

The "Notes to the Financial Statements" provide additional information and details about the company's financial statements that may not be apparent from just looking at the numbers. This information can be important for investors to fully understand the company's financial situation.

Question 7

EBITDA,sometimes called operating profit,is often emphasized by telecommunications companies because of their lack of real profitability.

Accepted Answer

EBITDA is often emphasized by telecommunications companies because it provides a better reflection of their operating performance by excluding non-operating expenses and non-cash items, such as depreciation and amortization, which can give a distorted view of profitability. However, this does not mean that telecommunications companies lack real profitability.

Question 8

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

Accepted Answer

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Question 9

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

Accepted Answer

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Question 10

To estimate the intrinsic value of a company,investors could use the dividend discount model to estimate intrinsic value,or an earnings multiplier model based on a forecast of next year's EPS and what is thought to be an appropriate P/E ratio.

Accepted Answer

The statement accurately describes two methods that could be used to estimate the intrinsic value of a company. The dividend discount model looks at the present value of future dividend payments, while the earnings multiplier model considers projected earnings and an appropriate price-to-earnings ratio.

Question 11

A company may maintain its ROA if the net income margin decreases by increasing its asset turnover.

Accepted Answer

ROA (return on assets) is calculated by dividing net income by total assets. Therefore, a company can maintain its ROA if, instead of increasing net income margin, it increases its asset turnover ratio. This means the company generates more revenue from the same level of assets, resulting in a higher ROA.

Question 12

A positive earnings surprise occurs when the forecasted earnings are greater than the actual earnings of a company.

Accepted Answer

A positive earnings surprise occurs when the actual earnings are greater than the forecasted earnings of a company.

Question 13

Investors interested in buying stocks that report bad news and suffer a sharp decline should buy the first day bad news is reported.

Accepted Answer

While it may seem tempting to buy stocks that have reported bad news and declined in value, it is important to conduct thorough research and analysis before making any investment decisions. The stock may continue to decline even after the initial drop or have underlying issues that led to the bad news. It is not advisable to make investment decisions based solely on one piece of information or event.

Question 14

Since extraordinary items affecting earnings are typically non-recurring,investors should disregard their impact on earnings when evaluating the stock.

Accepted Answer

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Question 15

International Financial Reporting Standards (IFRS)are now used by most countries.

Accepted Answer

The use of International Financial Reporting Standards (IFRS) has been adopted by most countries around the world. Approximately 120 countries require or permit the use of IFRS for publicly traded companies.

Question 16

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

Accepted Answer

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Question 17

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

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Question 18

According to Peter Lynch,the P/E ratio of a company that is fairly valued will equal its expected growth rate.

Accepted Answer

Peter Lynch's theory suggests that a company that is fairly valued will have a P/E ratio equal to its expected growth rate. This is based on the idea that a company's earnings should grow in line with its growth rate, and therefore, the P/E ratio, which compares the price of the stock to its earnings, should also be in line with the growth rate.

Question 19

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

Accepted Answer

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Question 20

The P/E ratio can be expected to change as the expected dividend payout ratio changes.

Accepted Answer

The P/E ratio is influenced by numerous factors, one of which is the expected dividend payout ratio. If a company increases its expected dividend payout ratio, it may increase its P/E ratio, all else being equal. Conversely, if a company decreases its expected dividend payout ratio, it may decrease its P/E ratio.

Quiz 15: Company Analysis