Key features of the free cash flow approach to valuation.

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.

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.

Give examples of low-quality earnings com