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Gleim CMA ReviewUpdate to Part 2

2015 Edition, 1st PrintingNovember 2014

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Study Unit 3 – Profitability Analysis and Analytical Issues

Page 72, Subunit 3.3, 1.c.: This change corrects the price/earnings ratio.

c. A high price/earnings ratio reflects the stock market’s positive assessment of the firm’s earnings quality and persistence. It measures how much an investor must spend to “buy” a dollar of earnings.

Price/Earnings Ratio

Market price per shareDiluted eEarnings per share

b. A high price/EBITDA ratio reflects the stock market’s positive assessment of the firm’s generation of profits through ongoing operations. It measures how much an investor must spend to “buy” a dollar of EBITDA.

Price/EBITDA Ratio

Market price per shareEBITDA per share

Page 74, Subunit 3.4, 1.e.: This change removes incorrect information.

d. Diluted Earnings Per Share (DEPS)

1) The numerator is increased by the amounts that would not have had to be paid if dilutive potential common stock had been converted, namely, dividends on convertible preferred stock and after-tax interest on convertible debt.

2) The denominator is increased by the weighted-average number of additional shares of common stock that would have been outstanding if dilutive potential common stock had been converted.

e. If EPS is used as part of a ratio calculation (e.g., price-earnings), DEPS should be used if available.

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Study Unit 5 – Financial Instruments and Cost of Capital

Page 126, Subunit 5.1, 2.b.: This change increases the number of years for bond maturity.

2. Aspects of Bonds

a. Bonds are the principal form of long-term debt financing for corporations and governmental bodies.

1) A bond is a formal contractual obligation to pay an amount of money (called the par value, maturity amount, or face amount) to the holder at a certain date, plus, in most cases, a series of cash interest payments based on a specified percentage (called the stated rate or coupon rate) of the face amount at specified intervals.

2) All of the terms of the agreement are stated in a document called an indenture.

b. Bringing a bond issue to market requires extensive legal and accounting work. The expense of this process is rarely worthwhile for bonds with maturities of less than 5 10 years.

1) In general, the longer the term of a bond, the higher will be the return (yield) demanded by investors to compensate for increased risk.

Study Unit 7 – Raising Capital, Corporate Restructuring, and International Finance

Page 199, Subunit 7.2, 3.d.: This change updates the ex-dividend date.

d. The ex-dividend date is a date established by the stock exchanges, such as 4 2 business days before the date of record. Unlike the other dates previously mentioned, it is not established by the corporate board of directors.

1) The period between the ex-dividend date and the date of record gives the stock exchange members time to process any transactions so that new shareholders will receive the dividends to which they are entitled.

2) An investor who buys a share of stock before the ex-dividend date will receive the dividend that has been previously declared. An investor who buys the stock after the ex-dividend date (but before the date of record or payment date) will not receive the declared dividend. Instead, the individual who sold the stock will receive the dividend because (s)he owned it on the ex-dividend date.

3) Usually, a stock price will drop on the ex-dividend date by the amount of the dividend because the new investor will not receive it.

Copyright © 2014 Gleim Publications, Inc. and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com