Question 1

Which of the following is not a reason why price-earnings ratios would differ across firms?

Accepted Answer

A)  Risk 
B)  Profitability 
C)  Growth 
D)  Operating leverage 
A)  Risk 
B)  Profitability 
C)  Growth 
D)  Operating leverage D

Question 2

What is the value of reverse engineering stock prices? How does the process work?

Accepted Answer

The process allows the analyst to infer a set of assumptions that appear to be impounded in a company's stock price. The analyst can then assess whether the assumptions the market appears to be making are realistic, optimistic, or pessimistic.
The process of reverse engineering stock prices assumes that intrinsic value equals market price and then solves for the assumptions the market appears to making in order to value the firm's shares at the market price.

Question 3

a. Compute the price-earnings ratio under the following sets of assumptions:
 $\begin{array}{|l|l|l|l|}
\hline & \text { Cost of Equity } & \text { Growth Rate } & \text { P/E } \
\hline \text { Scerario } & \text { Capital } & \text { in Earuings } & \text { Ratio } \
\hline 1 & 0.12 & 0.08 & \
\hline 2 & 0.12 & 0.10 & \
\hline 3 & 0.14 & 0.08 & \
\hline 4 & 0.17 & 0.08 & \
\hline 5 & 0.17 & 0.10 & \
\hline & & & \

\end{array}$
 b. Assess the sensitivity of the price-earnings ratio to changes in the cost of equity capital and changes in the growth rate.

Accepted Answer

$\begin{array}{|l|l|l|l|}
\hline \text { a. } & \text { Cost of Equity } & \text { Growth Rate } & \text { P/E } \
\hline \text { Scemario } & \text { Capital } & \text { in Earuings } & \text { Ratio } \
\hline 1 & 0.12 & 0.08 & 55.00 \
\hline 2 & 0.12 & 0.10 & 50.00 \
\hline 3 & 0.14 & 0.08 & 16.67 \
\hline 4 & 0.17 & 0.08 & 11.11 \
\hline 5 & 0.17 & 0.10 & 14.29 \
\hline & & &

\end{array}$
 b. The main issue is that as the cost of equity capital increases the P/E ratio will decrease, while it is just the opposite for growth. As the forecast of growth increases so will the P/E ratio.

Question 4

Assume a zero-growth rate for earnings and dividends in each situation below. Also assume that all earnings are paid out as dividends and that the earnings-based valuation model is being used.
Situation 1: Das Company's earnings are expected to be $9 per share and its stock price is $36. What is the required rate of return on the firm's equity?
Situation 2: South Company's earnings are expected to be $6 per share and its required rate of return on equity is 26%. What is the current price of the stock?
Situation 3: Jones Company's current stock price is $60 and its required rate of return on equity is 15%. What is the firm's expected earnings?

Accepted Answer

Situation 1: $36.00 = $9.00/r

Question 5

Under the value-to-book model a firm will be valued below book value when

Accepted Answer

A)  the ROCE is greater than RE 
B)  the ROCE is equal to RE 
C)  the ROCE is less than RE 
D)  the firm's growth rate is above the industry average 
A)  the ROCE is greater than RE 
B)  the ROCE is equal to RE 
C)  the ROCE is less than RE 
D)  the firm's growth rate is above the industry average

Question 6

Firms with low P/E ratios tend to have current residual income that is greater than

Accepted Answer

A)  future actual income. 
B)  future residual income. 
C)  past actual income. 
D)  past residual income. 
A)  future actual income. 
B)  future residual income. 
C)  past actual income. 
D)  past residual income.

Question 7

To estimate security's risk-neutral value we can use the _____________________________________________ and risk-free rates of return.

Accepted Answer

residual i

Question 8

The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.

Accepted Answer

aggregated

Question 9

Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.

Accepted Answer

The answer of Market multiples capture ____________________ valuation per dollar...

Question 10

In research examining market efficiency, Bernard and Thomas examined quarterly earnings announcements. Discuss how Bernard and Thomas test the issue of market efficiency and the results of their research.

Accepted Answer

Bernard and Thomas examine market effici

Question 11

In the value-to-book model growth adds value to shareholders only if the growth is ________________________________________.

Accepted Answer

abnormally

Question 12

The use of P/E ratios in valuation can result in measurement bias. What two items can result in measurement error and why?

Accepted Answer

The answer of The use of P/E ratios in valuation...

Question 13

Strictly speaking, the price-earnings ratio assumes that firm value is the

Accepted Answer

A)  future value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate. 
B)  future value of a constant stream of expected future earnings, discounted at a constant expected future discount rate. 
C)  present value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate. 
D)  present value of a constant stream of expected future earnings, discounted at a constant expected future discount rate. 
A)  future value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate. 
B)  future value of a constant stream of expected future earnings, discounted at a constant expected future discount rate. 
C)  present value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate. 
D)  present value of a constant stream of expected future earnings, discounted at a constant expected future discount rate.

Question 14

What methods have been developed to incorporate growth into price-earnings ratios? How do the methods incorporate growth? What are the advantages and/or disadvantages of these methods?

Accepted Answer

The perpetuity-with-growth approach and

Question 15

A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons. Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.

Accepted Answer

Because research and development activit

Question 16

Analysts use the PEG ratio to assess share price relative to earnings and _________________________________________________________________.

Accepted Answer

expected f

Question 17

What information can a PEG ratio provide about a company's stock price? What does a PEG ratio greater than one mean? less than one?

Accepted Answer

Analysts use the PEG ratio as a rule of

Question 18

A company with a PEG ratio of greater than one would be interpreted as having a stock price that is high relative to ______________________________.

Accepted Answer

The answer of A company with a PEG ratio of...

Question 19

All of the following are accounting factors that will cause a firm's value-to-book ratio to decrease over time except:

Accepted Answer

A)  recognizing unrealized gains on assets 
B)  a loss of competitive advantage through changes in technology or other factors 
C)  earning a high ROCE (above the equity cost of capital) on off-balance-sheet R&D assets 
D)  earning a high ROCE (above the equity cost of capital) on off-balance-sheet intangible assets (such as brand equity) over time 
A)  recognizing unrealized gains on assets 
B)  a loss of competitive advantage through changes in technology or other factors 
C)  earning a high ROCE (above the equity cost of capital) on off-balance-sheet R&D assets 
D)  earning a high ROCE (above the equity cost of capital) on off-balance-sheet intangible assets (such as brand equity) over time

Question 20

The risk of the firm increases the _____________________________________________.

Accepted Answer

equity cos

Which of the following is not a reason why price-earnings ratios would differ across firms?

What is the value of reverse engineering stock prices? How does the process work?

Under the value-to-book model a firm will be valued below book value when

Firms with low P/E ratios tend to have current residual income that is greater than

To estimate security's risk-neutral value we can use the _____________________________________________ and risk-free rates of return.

The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.

Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.

In research examining market efficiency, Bernard and Thomas examined quarterly earnings announcements. Discuss how Bernard and Thomas test the issue of market efficiency and the results of their research.

In the value-to-book model growth adds value to shareholders only if the growth is ________________________________________.

The use of P/E ratios in valuation can result in measurement bias. What two items can result in measurement error and why?

Strictly speaking, the price-earnings ratio assumes that firm value is the

What methods have been developed to incorporate growth into price-earnings ratios? How do the methods incorporate growth? What are the advantages and/or disadvantages of these methods?

A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons. Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.

Analysts use the PEG ratio to assess share price relative to earnings and _________________________________________________________________.

What information can a PEG ratio provide about a company's stock price? What does a PEG ratio greater than one mean? less than one?

A company with a PEG ratio of greater than one would be interpreted as having a stock price that is high relative to ______________________________.

All of the following are accounting factors that will cause a firm's value-to-book ratio to decrease over time except:

The risk of the firm increases the _____________________________________________.

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Financing Activities

Investing Activities

Operating Activities

Accounting Quality

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Filters

Exam 14: Valuation: Market-Based Approaches

Which of the following is not a reason why price-earnings ratios would differ across firms?

What is the value of reverse engineering stock prices? How does the process work?

Under the value-to-book model a firm will be valued below book value when

Firms with low P/E ratios tend to have current residual income that is greater than

To estimate security's risk-neutral value we can use the _____________________________________________ and risk-free rates of return.

The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.

Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.

In research examining market efficiency, Bernard and Thomas examined quarterly earnings announcements. Discuss how Bernard and Thomas test the issue of market efficiency and the results of their research.

In the value-to-book model growth adds value to shareholders only if the growth is ________________________________________.

The use of P/E ratios in valuation can result in measurement bias. What two items can result in measurement error and why?

Strictly speaking, the price-earnings ratio assumes that firm value is the

What methods have been developed to incorporate growth into price-earnings ratios? How do the methods incorporate growth? What are the advantages and/or disadvantages of these methods?

A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons. Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.

Analysts use the PEG ratio to assess share price relative to earnings and _________________________________________________________________.

What information can a PEG ratio provide about a company's stock price? What does a PEG ratio greater than one mean? less than one?

A company with a PEG ratio of greater than one would be interpreted as having a stock price that is high relative to ______________________________.

All of the following are accounting factors that will cause a firm's value-to-book ratio to decrease over time except:

The risk of the firm increases the _____________________________________________.

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Financing Activities

Investing Activities

Operating Activities

Accounting Quality

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Filters