Question 11

Earning Quality (EQ): One of the best indicators of EQ is a high percentage of the earnings,

accrual accounting defined, covered (or reflected) by working capital.

True

False

Question 12

Option Basics: A put option is the right to sell an asset at an agreed upon exercise price. A call

option is the right to buy an asset at a given strike price. The difference between the asset price

and the exercise price is used to determine whether the option is in the money, at the money, or

out of the money.

True

False

Question 13

Protective Put and Covered Call: A protective put is a form of insurance whereby a stock is

overlaid with a put option that is purchased. A covered call is the purchase of a share of stock

with a simultaneous sale of a call option on that stock. A protective put is an

example of the use of options in risk management.

True

False

Question 14

Price Metrics: The P/E ratio is a useful measure of the markets assessment of the firms growth

opportunities. Many analysts form their estimates of a stocks value by multiplying their forecast

of next years earnings per share by a predicted P/E multiple. The P/B ratio is a useful measure

of the markets assessment of the firms return on equity (ROE) opportunities. The P/S ratio is a

useful measure of the markets assessment of the firms net margins and the expectations thereof.

True

False

Question 15

FCFF: The Free Cash Flow to the Firm (FCFF) is oftentimes employed by private equity firms to

measure available pretax cash flows from operations minus necessary working capital and

essential capital spending needs. It is discounted via WACC. For equity valuation, the FCFF is

discounted by the WACC to arrive at a present value (PV), from which debt is subtracted to

arrive at an equity value.

True

False