Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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230 QUESTIONS AND PROBLEMS

9. Relationships in which EPS in a(n) ______________ period is

assumed to depend on EPS in one or more ______________

periods are called ______________ models. Often the data

used in forecasting EPS are ______________ and

______________ EPS of the company, but it is critical that

EPS be ______________ to reflect changes in accounting

requirements. For example, an analyst who used a(n)

______________ model would want to adjust

______________ reported EPS based on primary, diluted,

or fully diluted EPS for the new reporting requirements.

10.Many investors are interested in how the ______________

are valued by the market. A measure of how these earnings

are valued is the ______________ ratio (______________).

This ratio compares the ______________ per common

share with ______________ per common share. The result

is a multiple—the value of a share of ______________

expressed as a multiple of ______________ per share. The

______________ of this measure is referred to as the earn-

ings ______________ (______________).

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Earnings Analysis 231

SHORT ANSWER QUESTIONS

Refer to Chapter 23, pages 775–796 in Financial Manage-

ment and Analysis

1. What determines the market price of common stock?

2. What is earnings management and why is it such a con-

cern?

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232 QUESTIONS AND PROBLEMS

3. What is the relationship between earnings and stock price?

4. Why do the number of common shares outstanding

change? How does the change affect EPS?

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Earnings Analysis 233

5. How accurate are EPS forecasts?

PROBLEMS

Refer to Chapter 23, pages 775–796 in Financial Manage-

ment and Analysis

1. Too-Tired Company had 1.5 million shares of stock out-

standing at the beginning of the year and 1.87 million

shares at the end of the year. After issuing 0.37 million

shares at the beginning of the second quarter, if Too-Tired

had earnings available to common shareholders of $6.5

million, what is the company’s earnings per share?

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234 QUESTIONS AND PROBLEMS

2. HiGro Corporation had $1.80 in earnings per share and

paid dividends of $0.30 per share in 2001. HiGro was sell-

ing for $28.50 a share at the end of 2001. The book value

of HiGro’s common equity at the time was $22.00 per

share. HiGro has no preferred stock.

a. What was HiGro’s dividend payout ratio for 2001?

b. What was the P/E ratio at the end of 2001?

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Earnings Analysis 235

c. Are investors willing to pay more for the stock than its

earnings per share?

3. For the 1999 fiscal year, Outtel Corporation had net

income of $4,355 million. At the beginning of the year,

there were 1,323 million shares outstanding and at the end

of the year there were 1,300 million shares. There are 300

million potentially dilutive shares during 1999 from

employee stock option plans and warrants. Calculate the

basic and diluted earnings per share.

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236 QUESTIONS AND PROBLEMS

4. The Sagging Bay Company announced earnings of $1.82

per share for the 2002 fiscal year. The consensus analyst

forecast for 2002 earnings was $1.95.

a. Calculate the forecast error for Sagging Bay.

b. Explain the expected stock price reaction in response to

the worse-than-expected earnings.

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CHAPTER

237

Cash Flow Analysis

FILL IN THE BLANKS

Refer to Chapter 24, pages 797–817 in Financial Manage-

ment and Analysis.

1. ______________ ﬂows are essential ingredients in

______________: The value of a company today is the

present ______________ of its expected ______________

cash ﬂows. Therefore, understanding ______________

and ______________ cash ﬂows may help the analyst in

forecasting future cash ﬂows and, hence determine the

value of the company, and also may aid in assessing the

ability of a ﬁrm to maintain current ______________ and

its current capital ______________ policy without relying

on external ______________.

2. The primary difficulty with ______________ a cash flow is

that it is a flow: cash flows ______________ and cash flows

______________ of the company. At any point in time

there is a stock of ______________ on hand, but it varies

among companies because of the ______________ of the

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238 QUESTIONS AND PROBLEMS

company, the cash ______________ of the business, and

the company’s management of ______________ capital.

3. From the basic cash flow, the ______________ cash needs

are subtracted resulting in a cash flow referred to as

______________ cash flow. By restructuring the

______________ of cash flows in this way, the analyst can

see how much ______________ the company has when it

must make business ______________ that may adversely

impact the long-term financial ______________ of the

enterprise.

4. There is ______________ one correct method of

______________ free cash flow and different analysts may

arrive at different estimates for a company. The problem is

that because it is impossible to ______________ free cash

flow as dictated by the theory, so many ______________

have arisen to ______________ this cash flow.

5. The ______________ cash flow (______________) is free

cash flow less interest and other financing costs and taxes. In

this approach, free cash flow is defined as ______________

before depreciation, interest, and taxes ______________

capital expenditures. Capital ______________ encompass

all capital spending, whether for ______________ or

______________ and no changes in ______________ capital

are considered.

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Cash Flow Analysis 239

6. ______________ cash flow gives the analyst an idea of the

______________ cash flow of the company. This cash flow

measure may be useful from a(n) ______________ perspec-

tive in terms of evaluating the company’s ______________

to fund additional ______________. From a(n)

______________ perspective, net cash flow net of divi-

dends may be an appropriate measure because this repre-

sents the cash flow that is ______________ in the

company.

7. A useful ratio to help further assess a company’s cash flow is

the cash flow to ______________ ratio, or ______________

coverage ratio. This ratio gives the analyst information

about the financial ______________ of the company and is

particularly useful for ______________ -intensive firms and

utilities. The ______________ the ratio, the ______________

the financial flexibility.

8. Another useful cash flow ratio is the cash flow to

______________ ratio where debt can be represented as

total ______________, long-term ______________, or a

debt measure that captures a specific range of maturity

(e.g., debt maturing in 5 years). This ratio gives a measure

of a company’s ______________ to meet maturing

______________ obligations, thus it is a measure of a com-

pany’s ______________ quality.

9. The analysis of cash flows provides ______________ that

can be used along with other financial data to help the

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