Question 1

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 2

The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.

Accepted Answer

intrinsic

Question 3

Which of the following normally does not introduce measurement error into the calculation of P/E ratios?

Accepted Answer

A)  differences in firm specific growth rates 
B)  restructuring losses 
C)  transitory gains 
D)  deferred taxes 
A)  differences in firm specific growth rates 
B)  restructuring losses 
C)  transitory gains 
D)  deferred taxes D

Question 4

Which of the following would not be an example of the use of a multiple when valuing common equity?

Accepted Answer

A)  Price-to-operating cash flow 
B)  Price-to-book. 
C)  Price-to-earnings. 
D)  Multi-period discounted earnings models. 
A)  Price-to-operating cash flow 
B)  Price-to-book. 
C)  Price-to-earnings. 
D)  Multi-period discounted earnings models.

Question 5

Book value per share may not approximate market value per share because:

Accepted Answer

A)  Land may have substantially increased in value. 
B)  Market value reflects future potential earning power. 
C)  Investments may have a market value substantially above the original cost. 
D)  All of these are reasons why book value per share may not approximate market value per share. 
A)  Land may have substantially increased in value. 
B)  Market value reflects future potential earning power. 
C)  Investments may have a market value substantially above the original cost. 
D)  All of these are reasons why book value per share may not approximate market value per share.

Question 6

Which of the following ratios give a perspective on risk in the capital structure?

Accepted Answer

A)  Book value per share 
B)  Price/earnings ratio 
C)  Degree of financial leverage 
D)  Dividend yield 
A)  Book value per share 
B)  Price/earnings ratio 
C)  Degree of financial leverage 
D)  Dividend yield

Question 7

Economics teaches that, in equilibrium, firms will earn a return equal to the ______________________________.

Accepted Answer

The answer of Economics teaches that, in equilibrium, firms will...

Question 8

A company is expected to have a value of $142,857 at the start of next period and investors require a 14 percent return on equity capital. Using the assumptions of the price-earnings ratio, what would be the company's earnings for the current year?

Accepted Answer

A)  $20,000 
B)  $14,286 
C)  $2,800 
D)  $12,500 
A)  $20,000 
B)  $14,286 
C)  $2,800 
D)  $12,500

Question 9

Under the value-to-book model a firm in steady state equilibrium earning ROCE = RE will:

Accepted Answer

A)  create additional shareholder wealth and be valued above book value. 
B)  maintain shareholder wealth and be valued at book value. 
C)  destroy shareholder wealth and be valued below book value. 
D)  be in a no-growth state. 
A)  create additional shareholder wealth and be valued above book value. 
B)  maintain shareholder wealth and be valued at book value. 
C)  destroy shareholder wealth and be valued below book value. 
D)  be in a no-growth state.

Question 10

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

Accepted Answer

residual i

Question 11

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 12

Under the value-to-book model new projects will be less profitable only when:

Accepted Answer

A)  ROCE equals ROA 
B)  ROCE equals RE 
C)  ROCE is greater than RE 
D)  ROCE is less than RE 
A)  ROCE equals ROA 
B)  ROCE equals RE 
C)  ROCE is greater than RE 
D)  ROCE is less than RE

Question 13

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 14

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

Accepted Answer

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

Question 15

The risk of the firm increases the _____________________________________________.

Accepted Answer

equity cos

Question 16

Why is book value often meaningless? What improvements to financial statements would make it more meaningful?

Accepted Answer

Book value is based on a mixtu

Question 17

Companies value-to-book and market-to-book ratios may differ due to accounting reasons. An example of an accounting reason that would create a difference is:

Accepted Answer

A)  accelerated methods of depreciation. 
B)  investments in successful research and development programs that are expensed according to conservative accounting principles. 
C)  using LIFO versus FIFO for inventory. 
D)  high operating leverage. 
A)  accelerated methods of depreciation. 
B)  investments in successful research and development programs that are expensed according to conservative accounting principles. 
C)  using LIFO versus FIFO for inventory. 
D)  high operating leverage.

Question 18

The differences in industry market-to-book ratios may be the result of differences in growth, ROCE relative to RE, as well as differences in _______________________________________________________.

Accepted Answer

alternativ

Question 19

Discuss how risk and profitability factors cause differences in price-earnings ratios across firms. Explain the difference between abnormal and normal earnings.

Accepted Answer

Abnormal earnings are referred to as res

Question 20

Assuming that Ska Company's cost of equity capital is 14% and it expects to grow earnings at a rate of 8% per year, we would expect Ska's P/E ratio to be:

Accepted Answer

A)  8 
B)  16.7 
C)  14 
D)  4.5 
A)  8 
B)  16.7 
C)  14 
D)  4.5

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

The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.

Which of the following normally does not introduce measurement error into the calculation of P/E ratios?

Which of the following would not be an example of the use of a multiple when valuing common equity?

Book value per share may not approximate market value per share because:

Which of the following ratios give a perspective on risk in the capital structure?

Economics teaches that, in equilibrium, firms will earn a return equal to the ______________________________.

A company is expected to have a value of $142,857 at the start of next period and investors require a 14 percent return on equity capital. Using the assumptions of the price-earnings ratio, what would be the company's earnings for the current year?

Under the value-to-book model a firm in steady state equilibrium earning ROCE = R_E will:

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

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

Under the value-to-book model new projects will be less profitable only when:

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

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

The risk of the firm increases the _____________________________________________.

Why is book value often meaningless? What improvements to financial statements would make it more meaningful?

Companies value-to-book and market-to-book ratios may differ due to accounting reasons. An example of an accounting reason that would create a difference is:

The differences in industry market-to-book ratios may be the result of differences in growth, ROCE relative to R_E, as well as differences in _______________________________________________________.

Discuss how risk and profitability factors cause differences in price-earnings ratios across firms. Explain the difference between abnormal and normal earnings.

Assuming that Ska Company's cost of equity capital is 14% and it expects to grow earnings at a rate of 8% per year, we would expect Ska's P/E ratio to be:

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

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

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

The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.

Which of the following normally does not introduce measurement error into the calculation of P/E ratios?

Which of the following would not be an example of the use of a multiple when valuing common equity?

Book value per share may not approximate market value per share because:

Which of the following ratios give a perspective on risk in the capital structure?

Economics teaches that, in equilibrium, firms will earn a return equal to the ______________________________.

A company is expected to have a value of $142,857 at the start of next period and investors require a 14 percent return on equity capital. Using the assumptions of the price-earnings ratio, what would be the company's earnings for the current year?

Under the value-to-book model a firm in steady state equilibrium earning ROCE = RE will:

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

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

Under the value-to-book model new projects will be less profitable only when:

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

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

The risk of the firm increases the _____________________________________________.

Why is book value often meaningless? What improvements to financial statements would make it more meaningful?

Companies value-to-book and market-to-book ratios may differ due to accounting reasons. An example of an accounting reason that would create a difference is:

The differences in industry market-to-book ratios may be the result of differences in growth, ROCE relative to RE, as well as differences in _______________________________________________________.

Discuss how risk and profitability factors cause differences in price-earnings ratios across firms. Explain the difference between abnormal and normal earnings.

Assuming that Ska Company's cost of equity capital is 14% and it expects to grow earnings at a rate of 8% per year, we would expect Ska's P/E ratio to be:

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

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

Under the value-to-book model a firm in steady state equilibrium earning ROCE = R_E will:

The differences in industry market-to-book ratios may be the result of differences in growth, ROCE relative to R_E, as well as differences in _______________________________________________________.