When a Firm Has a Sharp Drop Off in Earnings

question 99

True/False

When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high.

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Definitions:

Net Working Capital Requirement

The amount of current assets a company needs minus its current liabilities to continue its operations smoothly.

Marginal Tax Rate

The rate at which your last dollar of income is taxed, representing the percentage of tax applied to your income for each tax bracket in which you qualify.

Salvage Value

An asset's expected selling price once it has concluded its period of usefulness.

Sunk Costs

Past expenditures that have already been incurred and cannot be recovered.