TRUE/FALSE(A = TRUE, B = FALSE) 18. Financial statement (ratio) analysis is comp
ID: 2644912 • Letter: T
Question
TRUE/FALSE(A = TRUE, B = FALSE) 18. Financial statement (ratio) analysis is complete find it does not have any limitations. 19. When you buy a call option, your profit rises as underlying stock rises, but your risk (loss) is limited to the premium you paid to buy the Options contract. 20. P/E ratio indicates how much investors paid for one dollar of earnings. 21. An option contract is obligatory from the standpoint of an option writer. 22. Under constant growth DCF model growth rate can exceed the required return. MULTIPLE CHOICE (Please choose the best answer) 23. Finance 361 Corporation has 100,000 shares of common stocks outstanding, its net income is $750,000, and it?s PIE in 8. What is the company?s stock price? a. $20 b. $30 c.$40 d. $50 e.$60Explanation / Answer
18. False :
Financial statement ( ratio ) analysis is the most popular financial analysis techniques for companies however it has certain limitations. They are :
1. Companies balance sheet are distorted by inflation. Inflation may have occurred since data is gathered and figures may be distorted.
2. Ratio analysis just give the numbers but not the factors bringing up the same.
3. Different companies might use different accounting policies, so the comparisons among the same might not be accurate.
19. True :
Call Option : This gives the buyer an option to buy the stock at an agreed price on a pre-determined date. The seller has an obligation to sell the commodity if the buyer avails the Call option. The buyer has to a pay a fixed premium amount to the seller of Call option upfront.
20. True :
P/E Ratio is company's current share price compared to its per-share Earnings.
21. True :
" Writing an Option " refers to the act of selling an option. When someone " writes " an option ,he or she must deliver ti the buyer a specified number of shares if the option is exercised. The writer has an obligation to perform the duty, while buyer has the option to take action.
22. False :
The constant growth DCF Model can be used to value stock only if stock's dividend are expected to grow forever at constant rate which is less than required rate of return on the stock.
23.
Shares : 100,000
Net Income : $750,000
P/E = 8
Earning Per Share ( EPS ) = Total Income/ Toatl number of shares
EPS = $750,000/ 100,000 = 7.5
P/E = Company current share price/ Earning per share
8= Company's current share price / 7.5
Therefore, Company's current share price ( stock price ) = 8* 7.5 = $60
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