Question 1

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

Question 2

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

Accepted Answer

cost of capital

Question 3

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 efficiency by forming 10 portfolios each quarter over the period 1974 to 1986 based on the size of firms' standardized unexpected earnings (SUE).They then calculate the abnormal returns for each portfolio for the 60 days prior to and including the release of earnings.Portfolios made up of the largest SUEs increased during this period,while portfolios made up of the lowest SUEs decreased.However,post-announcement abnormal returns followed this same trend,suggesting that security participants do not immediately react to the information in earnings announcements.

Question 4

Which of the following ratios usually reflects investor's opinions of the future prospects for the firm?

Accepted Answer

A)  Earnings per share 
B)  Dividend yield 
C)  Price/earnings ratio 
D)  Book value per share 
A)  Earnings per share 
B)  Dividend yield 
C)  Price/earnings ratio 
D)  Book value per share

Question 5

Explain the analysts' role in making the capital markets efficient.

Accepted Answer

Analysts play a key role in making the c

Question 6

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 7

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 8

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 9

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 10

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 11

a.Compute the price-earnings ratio under the following sets of assumptions:
   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

a.
@#IMG-DLM&
 
b.The main issue is that

Question 12

Trading on the equity is likely to be a good financial strategy for stockholders of companies having:

Accepted Answer

A)  Cyclically high and low amounts of reported earnings. 
B)  Steadily declining amounts of reported earnings. 
C)  Volatile fluctuations in reported earnings over short periods of time. 
D)  Steady amounts of reported earnings. 
A)  Cyclically high and low amounts of reported earnings. 
B)  Steadily declining amounts of reported earnings. 
C)  Volatile fluctuations in reported earnings over short periods of time. 
D)  Steady amounts of reported earnings.

Question 13

A company with a PEG ratio of less than one would be interpreted as having a stock price

Accepted Answer

A)  are underpriced given earnings and expected earnings growth 
B)  that is low relative to the company's growth prospects 
C)  that is high relative to the company's growth prospects 
D)  That is overvalued 
A)  are underpriced given earnings and expected earnings growth 
B)  that is low relative to the company's growth prospects 
C)  that is high relative to the company's growth prospects 
D)  That is overvalued

Question 14

Assuming that Ska'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

Question 15

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

1.Growth - Simple P/E ratios do not take

Question 16

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 17

The ______________________________ represents the difference between the current stock price and risk-neutral value.

Accepted Answer

The answer of The ______________________________ represents the difference between the...

Question 18

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 19

The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.

Accepted Answer

The answer of The value-to-book model indicates that a firm...

Question 20

The price differential,or the amount by which the market has discounted share price for risk,is calculated by

Accepted Answer

A)  subtracting the book value from the residual income model book value calculated using the risk free rate. 
B)  subtracting the market price from the residual income model price calculated using the risk free rate. 
C)  multiplying the theoretical price-earnings ratio by the market price. 
D)  subtracting the residual income model price calculated using RE from the residual income model price calculated using the risk free rate. 
A)  subtracting the book value from the residual income model book value calculated using the risk free rate. 
B)  subtracting the market price from the residual income model price calculated using the risk free rate. 
C)  multiplying the theoretical price-earnings ratio by the market price. 
D)  subtracting the residual income model price calculated using RE from the residual income model price calculated using the risk free rate.

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

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

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.

Which of the following ratios usually reflects investor's opinions of the future prospects for the firm?

Explain the analysts' role in making the capital markets efficient.

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

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?

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 _______________________________________________________.

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

a.Compute the price-earnings ratio under the following sets of assumptions: b.Assess the sensitivity of the price-earnings ratio to changes in the cost of equity capital and changes in the growth rate.

Trading on the equity is likely to be a good financial strategy for stockholders of companies having:

A company with a PEG ratio of less than one would be interpreted as having a stock price

Assuming that Ska'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

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

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 ______________________________ represents the difference between the current stock price and risk-neutral value.

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

The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.

The price differential,or the amount by which the market has discounted share price for risk,is calculated by

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

Accounting Quality

Financing Activities

Investing Activities

Operating Activities

Forecasting Financial Statements

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

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

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Exam 14: Valuation: Market-Based Approaches

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

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

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.

Which of the following ratios usually reflects investor's opinions of the future prospects for the firm?

Explain the analysts' role in making the capital markets efficient.

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

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?

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 _______________________________________________________.

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

a.Compute the price-earnings ratio under the following sets of assumptions: b.Assess the sensitivity of the price-earnings ratio to changes in the cost of equity capital and changes in the growth rate.

Trading on the equity is likely to be a good financial strategy for stockholders of companies having:

A company with a PEG ratio of less than one would be interpreted as having a stock price

Assuming that Ska'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

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

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 ______________________________ represents the difference between the current stock price and risk-neutral value.

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

The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.

The price differential,or the amount by which the market has discounted share price for risk,is calculated by

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

Accounting Quality

Financing Activities

Investing Activities

Operating Activities

Forecasting Financial Statements

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

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

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