Exam 14: Valuation: Market-Based Approaches

If the market price of a share of stock is based on the expectations of all of the market participants and the trading volume in that stock,what would happen if the company's reputation were damaged by a scandal or defective product that caused personal injury or death?

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Question 1

Correct Answer:

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The market participants probably would not want to be associated with a company whose reputation has been tarnished.They would sell off their shares,which would cause a high volume of trading for that stock,and price would fall due to the lack of faith in the company by the investing public.If the company does not rehabilitate their reputation,earnings may fall and the possibility of bankruptcy would be possible.

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

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Question 2

Correct Answer:

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C

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

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Question 3

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B

The market price of a share of common equity reflects:

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Question 4

Assume an analyst is evaluating a firm with $1,000 of book value of common equity and a cost of equity capital equal to 8 percent.Assume that the analyst forecasts that the firm will earn ROCE of 14 percent until year 2016,when the firm will start earning ROCE equal to 8 percent.The company pays no dividends and will not engage in any stock transactions.Use this information to complete the following table and calculate the firm's value-to-book ratio. Cumulative Residual PV of Residual Book Value ROCE times Present ROCE times Expected Residual Growth Factor Cumulative Value Cumulative Year ROCE ROCE to Year t-1 Growth Factor Growth 2011 0.14 0.9259 2012 0.14 0.8573 2013 0.14 0.7938 2014 0.14 0.7350 2015 0.14 0.6806 2016 0.08 0.6302 V/B Ratio =

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Question 5

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

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Question 6

Industries with relatively high market-to-book ratios are more likely to have ___________________________________ assets.

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Question 7

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

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Question 8

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:

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Question 9

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

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Question 10

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

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Question 11

Studies have shown that 50-70% of the variability in PE ratios across firms comes from __ and _.

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Question 12

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

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Question 13

The risk of the firm increases the _____________________________________________.

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Question 14

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

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Question 15

Residual income is defined as:

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Question 16

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

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Question 17

Assume an analyst is evaluating a firm with $1,000 of book value of common equity and a cost of equity capital equal to 12 percent.Assume that the analyst forecasts that the firm will earn ROCE of 18 percent until year 2015,when the firm will start earning ROCE equal to 12 percent.The company pays no dividends and will not engage in any stock transactions.Use this information to complete the following table and calculate the firm's value-to-book ratio. Cumulative Residual PV of Residual Book Value ROCE times Present ROCE times Expected Residual Growth Factor Cumulative Value Cumulative Year ROCE ROCE to Year t-1 Growth Factor Growth 2011 0.18 0.8929 2012 0.18 0.7972 2013 0.18 0.7118 2014 0.18 0.6355 2015 0.12 0.5674 V/B Ratio =

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Question 18

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?

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Question 19

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 _______________________________________________________.

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Question 20

If the market price of a share of stock is based on the expectations of all of the market participants and the trading volume in that stock,what would happen if the company's reputation were damaged by a scandal or defective product that caused personal injury or death?

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

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

The market price of a share of common equity reflects:

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

Industries with relatively high market-to-book ratios are more likely to have ___________________________________ assets.

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

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:

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

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

Studies have shown that 50-70% of the variability in PE ratios across firms comes from __ and _.

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

The risk of the firm increases the _____________________________________________.

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

Residual income is defined as:

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

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 _______________________________________________________.

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

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

If the market price of a share of stock is based on the expectations of all of the market participants and the trading volume in that stock,what would happen if the company's reputation were damaged by a scandal or defective product that caused personal injury or death?

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

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

The market price of a share of common equity reflects:

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

Industries with relatively high market-to-book ratios are more likely to have ___________________________________ assets.

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

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:

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

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

Studies have shown that 50-70% of the variability in PE ratios across firms comes from ________ and _______.

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

The risk of the firm increases the _____________________________________________.

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

Residual income is defined as:

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

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 _______________________________________________________.

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

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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Studies have shown that 50-70% of the variability in PE ratios across firms comes from __ and _.