Choose wisely. There is only one correct answer to each question.
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1.
Which generally takes more time and expertise to calculate?
Future cash flows. These require a lot of financial statements, facts, and projections to calculate.
2.
The Morningstar Rating for stocks _______.
Is analyst-driven. Morningstar estimates a company's fair value by determining how much it would pay today for all the streams of excess cash generated by the company in the future. It arrives at this value by forecasting a company's future financial performance using a detailed discounted cash-flow model that factors in projections for the company's income statement, balance sheet, and cash-flow statement. The result is an analyst-driven estimate of the stock's fair value.
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.
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.
5.
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.
