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1.
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.
2.
When Morningstar Ratings for stocks change, the changes are usually based on _______.
Changes in stock prices. The assessments don't change much, but the stock prices naturally do.
3.
If a stock has a Morningstar Rating of 3 stars, it is _______.
Fairly valued. Stocks that are trading very close to our analysts' fair value estimates will usually get 3-star ratings. Assuming that the stock's market price and fair value eventually converge, 3-star stocks should offer a "fair return." A fair return is one that adequately compensates you for the riskiness of the stock.
4.
What is a drawback of using ratios (such as price/earnings ratio or price/book ratio) to value stocks?
They require context to understand. For example, there may be a disconnect between the ratio and the market price of the stock.
5.
Which Uncertainty Rating requires the largest discount (margin of safety) for a stock to become rated 5 stars?
Very high. Stocks with an Uncertainty Rating of Very High require the largest discount to Morningstar's Fair Value Estimate before they become rated 5 stars.
