ISDS 2000 Chapter 1 Notes

# ISDS 2000 Chapter 1 Notes - ISDS2000 07:43:00 I...

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ISDS 2000 02/09/2009 07:43:00 I. Chapter 1: Data and Statistics A. What is Business Statistics?  1. Business Statistics encompasses  methods of utilizing data for purposes  of making better business decisions. 2. With the wealth of information  available today, businesspersons  needs to know  how to use  information efficiently and  effectively for better decision making.   B. Future Statistical Involvement  1. practitioner of statistics

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2. consumer of statistical claims C. Applications in Business and Economics  (Section 1.1) 1. Accounting – In auditing, staff selects  a random sample of accounts in  order  to estimate the amount of accounts  receivable.  This should closely  match  that reported by the company. 2. Finance – Financial Analysts can use  P/E ratio, with other information,  to  help recommend buy, sell, or hold. http://www.investopedia.com/terms/p/price-earningsratio.asp
Price-Earnings Ratio - P/E Ratio A valuation ratio of a company's current share price compared to its per- share earnings. Calculated as: For example, if a company is currently trading at \$43 a share and earnings over the last 12 months were \$1.95 per share, the P/E ratio for the stock would be 22.05 (\$43/\$1.95). EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. Also sometimes known as "price multiple" or "earnings multiple". In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay \$20 for \$1 of current earnings. It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

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