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Reading 48: Market-Based Valuation: Price Multiples -LOS

1.Underlying earnings may be defined as earnings:

A)   that include non-recurring components.

B)   net of underlying after-tax interest.

C)   that exclude non-recurring components.

D)   net of capital expenditures needed to keep the business productive.

2.Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?

A)   22.22.

B)   19.69.

C)   25.51.

D)   20.66.

3.Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?

A)   37.14.

B)   31.86.

C)   44.52.

D)   33.50.

答案和详解如下:

1.Underlying earnings may be defined as earnings:

A)   that include non-recurring components.

B)   net of underlying after-tax interest.

C)   that exclude non-recurring components.

D)   net of capital expenditures needed to keep the business productive.

The correct answer was C)

Underlying earnings are earnings that exclude non-recurring items. They are also known as persistent, continuing, or core earnings.

2.Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?

A)   22.22.

B)   19.69.

C)   25.51.

D)   20.66.

The correct answer was B)

Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $2.25 + $0.17 + $0.12 = $2.54. The resulting trailing P/E = 50.00/2.54 = 19.69.

3.Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?

A)   37.14.

B)   31.86.

C)   44.52.

D)   33.50.

The correct answer was B)

Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $1.75 + $0.19 + $0.10 = $2.04. The resulting trailing P/E = 65.00/2.04 = 31.86.

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