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Series 86 Ch a questions with complete solutions 2024
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Series 86 Ch a questions with complete solutions 2024
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Series 86 Ch. 4Price to earnings - correct answer ✔(P/E) Price of the sercurity and its
earnings per share--allows comparisons from oen company to another. More
consevative to calculate with diluted share count. An indication of how the
market capitalizes a company's earnings, or what the market is willing to apy
for each dollar of earnings. The earnings portion is adjusted according to
accounting activities and nonrecurring items.
P/E from dividend, payout, and yield - correct answer ✔Earnings per share
of the company is equal to:
(annual dividend/dividend payout ratio)
Current price is calcualted by:
(annual dividend/current dividend yield)
Negative earnings - correct answer ✔If ranking companies by PE ratios the
lowest positive PE ratio is the most economic per dollar of earnings. Order by
earnings yield.
PEG ratio - correct answer ✔(P/E)/Annual growth rate
Analysts look for PEG of less than 1.
Calculate PEG ratio using market cap., total assets, total liabilities, net income
and dividend payout ratio - correct answer ✔Market cap/net income=PEG
PE*Net income = market cap
Growth rate: 1-(dividend payout*ROE)
Rule of 72 - correct answer ✔72/(# of periods to double)= growth rate
,CAGR - correct answer ✔(Ending yr/Beginning yr)/(1/NPER)-1
Or trial and error method (easier and faster)
FCF - correct answer ✔Cash flow from operations minus CAPEX
FCFF: cash available to providers of capital (bond and stock holdres after
OpEx is covered)
Cash flow from financing debt, preferred stock, and equity has an important
imapct on asset valuation.
Accounted for net of taxes.
FCFE - correct answer ✔Accounted for interest payments and taxes paid.
Free cash flow ratio - correct answer ✔Price/FCF
Free cash flow yield - correct answer ✔FCF/Price
Price to sales - correct answer ✔Market value of equity/revenue
Current price per share/revenue per share
*Appropriate when evaluating companies that are unprofitable, have low profit
margins, or are start-ups, since such companies do not have a useful
price/earnings ratio. The ratio is not influenced by a firmst accounting
decisions, such as depreciation, R&D expenses, and extraordinary charges.
Keep in mide that the average price/sale ratio can vary substantially industry
to industry.
Price to book value - correct answer ✔P/B
Measurement that looks at the value that the market places on the book value
of a compane
, Book value:
Shareholders equity/Number of shares outstanding
Price -to-book-value: share price/book price per share
Below 1.0 means the company is selling below its book value and is
theoretically below its liquidation value. Value investors shun companies that
rade above two times the book value.
Uses hsitorical balance sheet #s, less volitile than PES and ratio trends to be
positive. More stable in times of abnormal earnings and prvides for
comparisons o ver the long term. Good method for comparison when
evaluating companies such as insurance/banking that hold high levels of liquid
assets. Primarily used hsitorically for industrial companies that have hard
assets, and capital-intensive companies. Currently used for valuation of
financial institutions.
EV/EBITDA - correct answer ✔value for the whole company rather than a
value based on common stock. By sueind EBITDA, the elements of interest,
tax, and D&A are eliminated. Also, in times when EPS is negative, P/E is
invalid while EBITDA is still a positive figure that can be used.
Enterprise value - correct answer ✔Real tangible price at whic ha company
may be purchased. EV is not necessarily the amount that a buyer is willing to
pay, or seller is willing to accept.
Market cap + debt + capital leases + minority interest - cash -cash equivalents
Represents the actual purchase price that someone might pay to acquire the
company on the day of the calculation. Also can: equit value + net debt.
If a company has more cash than debt, the enterprise value would be below
market cap. If a company has no cash, the enterpeise value would be the
market value of the stock, plus the market value of its debt. If the company
has less cash than debt, EV would be greater than the company's market cap.
Market value per share from enterprise value debt and cash - correct answer
✔EnterpriseValue/common shares out standing
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