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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.
What does Morningstar prefer to use to value stocks?
Future profits. Using future profits is easier to understand and requires less context than using ratios.
3.
How would a tiny change in a stock's price change its Morningstar Rating?
It likely would not change it. There is a buffer zone built into the ratings to prevent tiny changes from leading to a new rating.
4.
Which generally takes more time and expertise to calculate?
Future cash flows. These require a lot of financial statements, facts, and projections to calculate.
5.
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.
