Question 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.
Question 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?