E7-1 Free cash flow valuation (LO 7-1)

E7-1 Free cash flow valuation (LO 7-1)

Required:

1. What are free cash flows?
2. Explain the difference between a company’s operating cash flow under GAAP and its free cash flow.
3. Briefly describe the key features of the free cash flow approach to valuation.

ACC305 Analysis Financial Statements

E7-5 Why P/E ratios vary (LO 7-4)

The price/earnings ratios of four companies from the same industry are:

Company                                                       P/E Ratio

Ingles Markets                                                 7.9

Kroger                                                              6.6

Sprouts Farmers Market                                  18.3

Weis Markets                                                  17.4

Source: Based on closing stock prices on March 17, 2019, and trailing-twelve-months earnings per share, both from Yahoo Finance.

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Required:

What factors might explain the difference in the P/E ratios of these companies?

E7-7 Earnings quality (LO 7-5)

Required:

1. Define the term quality of earnings.
2. List the techniques that management can use to improve a company’s reported earnings performance in the short run.
3. Give examples of low-quality earnings components E7-1 Free cash flow valuation (LO 7-1)

E7-1 Free cash flow valuation (LO 7-1)