Questions

Topic 1: CH 1 & 2
Introduction to valuation and financial statements

CHAPTER 1. INTRODUCTION TO VALUATION

C1.1. What is the difference between fundamental risk and price risk?
C1.2. What is the difference between an alpha technology and a beta technology?
C1.4. What is the difference between a passive investor and an active investor?
C1.7. Some commentators argue that stock prices “follow a random walk.” By this they mean
that changes in stock prices in the future are not predictable, so no one can earn an abnormal
return. Would stock prices follow a random walk if all investors were fundamental investors
who use all available information to price stocks and agreed on the implications of that
information?
E1.1. Calculating Enterprise Value (Easy)
The shares of a firm trade on the stock market at a total of $1.2 billion, and its debt trades at
$600 million. What is the market value of the firm (its enterprise market value)?
E1.2. Calculating Value per Share (Easy)
An analyst estimates that the enterprise value of a firm is $2.7 billion. The firm has $900
million of debt outstanding. If there are 900 million shares outstanding, what is the analyst’s
estimated value per share?
E1.6. Identifying Operating, Investing, and Financing Transactions: Microsoft (Easy)
Microsoft Corp. reported the following in its annual report to the Securities and Exchange
Commission for fiscal year ending June 30, 2011. Classify each item as involving an
operating, investing, or financing activity. Amounts are in millions.
a. Common stock dividends
b. General and administrative expenses
c. Sales and marketing expenses
d. Common stock issues
e. Common stock repurchases
f. Sales revenue
g. Research and development expenditures
h. Income taxes
i. Additions to property and equipment
j. Accounts receivable
CHAPTER 2. INTRODUCTION TO FINANCIAL STATEMENTS
C2.2. Dividends are the only way to pay cash out to shareholders. True or False?
C2.3. Explain the difference between net income and net income available to common.
Which definition of income is used in earnings-per-share calculations?
C2.5. Explain why some firms have high price-earnings (P/E) ratios.
C2.6. Give some examples in which there is poor matching of revenues and expenses.