Question 1

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

Accepted Answer

The P/E ratio (price-to-earnings ratio) is calculated by dividing the market price per share by the earnings per share. As dividends are paid out of earnings, an increase in the expected dividend payout ratio would decrease the earnings per share, which in turn would increase the P/E ratio. Conversely, a decrease in the expected dividend payout ratio would increase the earnings per share and decrease the P/E ratio. Therefore, the P/E ratio can be expected to change as the expected dividend payout ratio changes.

Question 2

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

Buying stocks immediately after bad news is reported can be risky as there could be further declines in the short term. It is important to conduct research and analysis to determine if the stock is undervalued and has long term growth potential before making a purchase.

Question 3

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

Accepted Answer

Apple, as well as other companies, have been known to provide conservative guidance, which can result in positive earnings surprises.

Question 4

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 is an indicator of their operating profit even if they are not generating real profitability due to high operational and capital expenses.

Question 5

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

Accepted Answer

The answer of Since extraordinary items affecting earnings are typically...

Question 6

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

Accepted Answer

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

Question 7

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 8

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

Accepted Answer

The auditor's report expresses an opinion on the fairness of the financial statements, but it does not guarantee the accuracy of the reported earnings.

Question 9

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

Accepted Answer

Leverage allows companies to borrow money to invest in their operations, which can lead to higher profits for shareholders. However, if the investments do not pay off, the company may struggle to repay the loans, resulting in potentially large losses for shareholders. Therefore, leverage can both increase profits and losses for shareholders.

Question 10

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

Accepted Answer

The answer of Other things being equal, as k rises,...

Question 11

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

Accepted Answer

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

Question 12

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 decrease in net income margin (net income divided by revenue) can be offset by an increase in asset turnover (revenue divided by total assets) in order to maintain the same ROA.

Question 13

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 explanations that are not included in the financial statements themselves, and can help investors understand important aspects of the company's financial situation.

Question 14

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

Accepted Answer

Free cash flow is the cash a company generates after taking care of all its expenses, including capital expenditures, debt payments, and dividend payments.

Question 15

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 16

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 dividend discount model and earnings multiplier model are both commonly used methods to estimate the intrinsic value of a company. The dividend discount model involves estimating the present value of future dividend payments, while the earnings multiplier model calculates the intrinsic value based on a forecast of next year's earnings per share and an appropriate price-to-earnings ratio.

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?

Accepted Answer

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

Question 18

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

Accepted Answer

The answer of What is the relationship of the Financial...

Question 19

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 statement is also known as the "PEG ratio" and suggests that a company's P/E ratio should be in line with its earnings growth rate. This is based on the idea that a company with a higher growth rate should have a higher valuation, reflected in a higher P/E ratio. However, this idea has been debated and some investors may use different valuation metrics to determine whether a company is fairly valued.

Question 20

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

Accepted Answer

IFRS have been adopted by over 120 countries, including major economies such as the European Union, Australia, and Canada.

Quiz 15: Company Analysis