Reading 24: Macroanalysis and Microvaluation of the Stock M share, contrast

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CFA Institute Area 6: Economics
Session 6: Economic Concepts for Asset Valuation in Portfolio Management
Reading 24: Macroanalysis and Microvaluation of the Stock Market
LOS d: Compare and contrast alternative approaches to the estimation of earnings per share.

[此贴子已经被作者于2008-9-16 17:50:27编辑过]

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Which of the following methods would provide the most stable estimate of net profits for a stock market series?

A) Estimate net profit margins based on recent trends.

B) Estimate the net profits before tax profit margin and then subtract out taxes.

C) Estimate the operating profit margin and then subtract out estimated depreciation, amortization, interest, and taxes.

D) Use a time series regression to estimate the net profits before tax profit margin and then subtract out taxes.

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 Answer and Explanation

The method that provides the most stable estimates of net profits is to estimate the operating profit margin, which is defined as earnings before depreciation, amortization, interest, and taxes (EBITDA). We then subtract out the estimates of depreciation, amortization, interest, and taxes.

tycoon

When estimating the net profits for a stock market series, which of the following would be related to the sales level?

A) Depreciation.

B) EBITDA.

C) Amortization.

D) Interest Expense.

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Answer and Explanation

EBITDA (Earnings before depreciation, amortization, interest, and taxes) or the operating profit margin would be calculated as a percent of sales. Depreciation and amortization should not be calculated as a percent of sales because they are more closely tied to the level of capital expenditures. Interest expense also should not be calculated as a percent of sales because it is dependent on the level of debt and interest rates.

tycoon

When estimating the earnings before depreciation, amortization, interest, and taxes (EBITDA) for a stock market series, which of the following has NOT been verified empirically to result in lower profits?

A) Higher inflation.

B) Higher import levels.

C) Higher unit labor costs.

D) Lower capacity utilization.

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Answer and Explanation

Higher inflation, higher unit labor costs, and lower capacity utilization have all been verified empirically to result in lower EBITDA margins. Although higher import levels should result in greater competition for domestic producers and lower profit margins, this relationship was not found in empirical testing.

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