Cash Flow and Price Earnings
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1. The quarterly cash flows from operations for two software companies are:
2010 2011
Q1 Q2 Q3 Q4 Q1
Firm A $406.1 $204.2 $729.1 $ 440.2 $ 587.8
Firm B $136.7 $243.1 $708.2 $ (87.9) $(161.4)
a. Explain why Firm B has more credit risk than Firm A.
b. Suppose that Firm B's cash flow was $200 higher each quarter (e.g., $336.7 in Q1 of 2010). Explain why Firm B might still be judged to have higher credit risk than Firm A.
2. The price / earnings ratios of four companies from different industries are:
Company P/E Ratio
Amazon.com 90
Microsoft 22
Toyota Motors 11
Whole Foods Market 34
a. What factors might explain the difference in the P/E ratios of these companies?
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Solution Summary
The solution determines the cash flow and price earnings for the software companies.
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1. The quarterly cash flows from operations for two software companies are:
2010 2011
Q1 Q2 Q3 Q4 Q1
Firm A $406.1 $204.2 $729.1 $ 440.2 $ 587.8
Firm B $136.7 $243.1 $708.2 $ (87.9) $(161.4)
a. Explain why Firm B has more credit risk than Firm A.
In reviewing the quarterly cash flows, it can be determined that both companies seem to have quarterly sales, as the cash flow levels change drastically quarter to ...
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