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1.
The Morningstar Rating for a stock can change for which of the following reasons?
A combination of any of these factors. Any one or several of these factors can cause a change in the rating.
2.
An estimate of a company's fair value involves determining how much one would pay today for all the sales generated by the company in the future.
False. Rather than sales, the estimate uses streams of excess cash.
3.
The Morningstar Fair Value Estimate represents which of the following?
An estimate of how much a stock should be worth today based on how much cash flow the company is expected to generate in the future. Morningstar's Fair Value Estimate represents how much a stock should be worth today based on how much cash flow the company is expected to generate in the future. The Morningstar Fair Value Estimate should not be confused with a target price, which is how much the market might be willing to pay for a stock. To arrive at a fair value, Morningstar analysts use a detailed discounted cash-flow model that factors in projections for the company's income statement, balance sheet, and cash-flow statement. It is not adding projected earnings growth to a stock's current trading price.
4.
Five-star stocks should generate a return _______.
Greater than the company's cost of equity. Five-star stocks should offer investors a return that is greater than the company's cost of equity. The cost of equity is often called the "required return," because it represents the return an investor requires for taking on the risk of owning a stock. Since 5-star stocks are considerably undervalued, we expect investors will enjoy high returns that significantly exceed the risks associated with investing in the stock.
5.
Which generally takes more time and expertise to calculate?
Future cash flows. These require a lot of financial statements, facts, and projections to calculate.
