Exam 11: Equity Analysis and Valuation

Interim financial reports:

If a company has a high price-to-book ratio (PB) and low price-to-earnings (PE) ratio, this suggests that:

Which of the following should be considered when examining a software development company's earnings persistence? I. Changes in accounting estimates II. Amount spent on software development III. Gains from sale of marketable securities IV. Managerial compensation

Adjusting earnings includes assigning earnings components from the recast income statements to periods they likely belong.

The SEC requires monthly financial reports to be filed (Form 10-M).

A profitable mature company would generally have:

Which of the following statements is most correct?

Alexas Corporation reports the following: Earnings per share \ 1.80 Dividends per share \ 0.72 Book value per share- at the end of the \ 8.62 year -If price-to-book ratio at the end of 2005 equals 1.00, and return on beginning of year equity is expected to remain constant, then cost of equity (to nearest percent) equals:

Interim financial reports are generally prepared using the same accounting methods as used for the annual financial reports.

Company A and Company B operate in the same industry. Company B has a price-to-book ratio that is much higher than A's. Both companies have price-to-book ratios greater than one. Which of the following could explain this difference, all else equal?

a. What is meant by "earnings persistence"? b. Why might an analyst be interested in examining the earnings persistence of a company? c. How might managerial incentives affect the analysis of earnings persistence?

A stock that has a low price-to-earnings ratio and a low price-to-book ratio is an indicator of a stock that is expected to have slow or negative growth in earnings and a low return on common stockholders' equity.

Alexas Corporation reports the following: Earnings per share \ 1.80 Dividends per share \ 0.72 Book value per share- at the end of the \ 8.62 year -If price-to-book ratio at the end of 2005 equals 1.00, then PE ratio at end of 2004 equals (pick closest number):

The higher the dividend payout ratio, the lower the PE ratio of the stock.

Which of the following should be attempted in order to gauge the quality of a company's earnings? I. Assessing an adequacy of discretionary expenditures II. Assessing degree of conservatism in reporting assets III. Assessing degree of conservatism in reporting liabilities IV. Assessing degree of conservatism in application of accounting principles

Earnings management uses acceptable accounting reporting principles for purposes of reporting specific results.

ABC Corporation and DEF Corporation operate in the same industry. ABC has a PE ratio that is 50% higher than DEF Corporation. Which of the following accounts for some of the difference in the observed PE ratios? I. ABC uses more conservative accounting principles. II. ABC has a higher cost of equity capital. III. ABC has higher expected future growth. IV. DEF uses FIFO and ABC uses LIFO.

Two companies, A and B, have the same ROEs, but Company A has a higher residual income. Which of the following would explain this, all else equal?

Fristy Corporation has a book value of equity of $5,000 at the beginning of 2005, and net income of $1,000 for year ended 2005. It pays no dividends, and its cost of equity capital is 10%. It expects return on beginning of year equity to remain constant for 2006 and 2007 and decrease to 10% thereafter. What should its price-to-book ratio be at the end of 2005 (pick closest number)?

Which of the following will affect observed price-to-earnings ratio (lagged ratio): I. Quality of earnings II. Business risk III. Risk free rate of interest IV. Expected growth