Question 1

If a company's return on equity is lower than its cost of equity capital, then the higher the dividend payout ratio the higher the P/E of the stock.

Accepted Answer

A) True 
 B)False  True

Question 2

Pitfalls when forecasting earnings include failure to consider
I. capital adequacy
II. capacity constraints
III. anticipated return on equity
IV. new management

Accepted Answer

A)  I and III 
B)  II and IV 
C)  I, III and IV 
D)  I, II and III 
A)  I and III 
B)  II and IV 
C)  I, III and IV 
D)  I, II and III D

Question 3

Alexas Corporation reports the following:
 $\begin{array}{|l|l|}
\hline
&\mathbf{2 0 0 5}\
\hline \text { Earnings per share } & \$ 1.80 \
\hline \text { Dividends per share } &  \$ 0.72\
\hline \text { Book Value per share-end of year } &  \$8.62\
\hline
\end{array}$
-If Price to book value at the end of 2005 equals 1.00, then P/E ratio at end of 2003 equals (pick closest number):

Accepted Answer

A)  8.38 
B)  4.78 
C)  4.19 
D)  Not determinable 
A)  8.38 
B)  4.78 
C)  4.19 
D)  Not determinable C

Question 4

The value of common stockholders' equity can be estimated as the present value of future abnormal earnings discounted at the cost of equity.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following would not be considered a component of business risk?

Accepted Answer

A)  Financial leverage 
B)  Variability of demand 
C)  Variability of price of inputs to production 
D)  Changing regulatory requirements 
A)  Financial leverage 
B)  Variability of demand 
C)  Variability of price of inputs to production 
D)  Changing regulatory requirements

Question 6

Which of the following is not a form of earnings management?

Accepted Answer

A)  Changes in accounting assumptions 
B)  Timing revenue recognition 
C)  Write-downs of operating assets 
D)  Reporting fictitious transactions 
A)  Changes in accounting assumptions 
B)  Timing revenue recognition 
C)  Write-downs of operating assets 
D)  Reporting fictitious transactions

Question 7

The price-to-book value of a company can be shown to be a function of future expected return on common stockholders' equity and risk of equity capital.

Accepted Answer

A) True 
 B)False

Question 8

The number of shares outstanding a company has will affect its earnings per share and price/earnings ratio.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements concerning interim financial reports is incorrect?

Accepted Answer

A)  Accrual accounting is used for revenue and expense recognition 
B)  Extraordinary items are reported in annual but not interim financial reports 
C)  LIFO liquidation is not reported for interim purposes, unless decline in inventory is expected to be permanent 
D)  Income taxes are accrued using effective tax rate expected for the annual period 
A)  Accrual accounting is used for revenue and expense recognition 
B)  Extraordinary items are reported in annual but not interim financial reports 
C)  LIFO liquidation is not reported for interim purposes, unless decline in inventory is expected to be permanent 
D)  Income taxes are accrued using effective tax rate expected for the annual period

Question 10

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

Accepted Answer

A)  All of the above 
B)  II, III and IV 
C)  II and IV 
D)  I, II and IV 
A)  All of the above 
B)  II, III and IV 
C)  II and IV 
D)  I, II and IV

Question 11

The SEC has issued "safe harbor" rules to encourage forecasts by registrants, but it has had limited success.

Accepted Answer

A) True 
 B)False

Question 12

The number of shares authorized a company has will affect its earnings per share ratio.

Accepted Answer

A) True 
 B)False

Question 13

Hupta Corporation
 $$\begin{array} { | l | r | } 
\hline & \mathbf { 2 0 0 5 } \
\hline \text { Net income } & \$ 6,000 \
\hline \text { Dividends } & \$ 2,000 \
\hline \text { Total assets-12/31/05 } & \$ 50,000 \
\hline \text { Total liabilities-12/31/05 } & \$ 20,000 \
\
\hline \text { Number of shares outstanding } & 1,000 \
\hline \text { Cost of equity } & 10 \% \
\hline
\end{array}$$
-Using the dividend discount model, assuming dividends grow at 10% in 2006 and at 5% thereafter, what is the value per share of Hupta at 12/31/05?

Accepted Answer

A)  $48.20 
B)  $44.00 
C)  $40.18 
D)  $40.00 
A)  $48.20 
B)  $44.00 
C)  $40.18 
D)  $40.00

Question 14

Variability in earning numbers:

Accepted Answer

A)  Is desirable as it increases variance of earnings and hence value of stock options 
B)  Increases if a company increases its operating leverage 
C)  Increases if a company decreases its financial leverage 
D)  Is independent of operating leverage 
A)  Is desirable as it increases variance of earnings and hence value of stock options 
B)  Increases if a company increases its operating leverage 
C)  Increases if a company decreases its financial leverage 
D)  Is independent of operating leverage

Question 15

You are analyzing a stock. You expect that earnings will grow quickly relative to their current level, but the expected return on common stockholders' equity is low. What levels of the price earnings ratio (P/E) and price to book value ratio (P/BV) would you expect to see (relative to industry average)? $$\begin{array} { | c | c | c | } 
\hline & \text { P/E Ratio } & \text { P/BV Ratio } \
\hline \text { A) } & \text { Low } & \text { Low } \
\hline \text { B) } & \text { Low } & \text { High } \
\hline \text { C) } & \text { High } & \text { High } \
\hline \text { D) } & \text { High } & \text { Low } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 16

Quality of earnings is generally lower the more liberal the accounting methods used by a company.

Accepted Answer

A) True 
 B)False

Question 17

Adjustments to income statement numbers should be done following the estimation of the earnings persistence.

Accepted Answer

A) True 
 B)False

Question 18

Business risk:

Accepted Answer

A)  Is independent of actions by management 
B)  Does not affect the systematic risk of a company 
C)  Refers to financial leverage 
D)  Is a component of the overall risk of a company 
A)  Is independent of actions by management 
B)  Does not affect the systematic risk of a company 
C)  Refers to financial leverage 
D)  Is a component of the overall risk of a company

Question 19

Which of the following statements is most correct?

Accepted Answer

A)  If two companies have the same ROE and the same risk they must have the same residual income (abnormal earnings) for the year 
B)  If two companies have the same net book value and the same residual income this year, then their stock prices must be the same 
C)  If two companies have the same ROE and the same stock price their earnings must be the same for the year 
D)  If two companies have the same ROE, net book value, and cost of capital then their residual income must be the same for the year 
A)  If two companies have the same ROE and the same risk they must have the same residual income (abnormal earnings) for the year 
B)  If two companies have the same net book value and the same residual income this year, then their stock prices must be the same 
C)  If two companies have the same ROE and the same stock price their earnings must be the same for the year 
D)  If two companies have the same ROE, net book value, and cost of capital then their residual income must be the same for the year

Question 20

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?

Accepted Answer

A)  Company A is riskier than Company B 
B)  Company A has higher expected future growth 
C)  Company A has greater net book value 
D)  Company A has lower ROA 
A)  Company A is riskier than Company B 
B)  Company A has higher expected future growth 
C)  Company A has greater net book value 
D)  Company A has lower ROA

If a company's return on equity is lower than its cost of equity capital, then the higher the dividend payout ratio the higher the P/E of the stock.

Pitfalls when forecasting earnings include failure to consider I. capital adequacy II. capacity constraints III. anticipated return on equity IV. new management

Alexas Corporation reports the following: Earnings per share \ 1.80 Dividends per share \ 0.72 Book Value per share-end of year \8 .62 -If Price to book value at the end of 2005 equals 1.00, then P/E ratio at end of 2003 equals (pick closest number):

The value of common stockholders' equity can be estimated as the present value of future abnormal earnings discounted at the cost of equity.

Which of the following would not be considered a component of business risk?

Which of the following is not a form of earnings management?

The price-to-book value of a company can be shown to be a function of future expected return on common stockholders' equity and risk of equity capital.

The number of shares outstanding a company has will affect its earnings per share and price/earnings ratio.

Which of the following statements concerning interim financial reports is incorrect?

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

The SEC has issued "safe harbor" rules to encourage forecasts by registrants, but it has had limited success.

The number of shares authorized a company has will affect its earnings per share ratio.

Variability in earning numbers:

Quality of earnings is generally lower the more liberal the accounting methods used by a company.

Adjustments to income statement numbers should be done following the estimation of the earnings persistence.

Business risk:

Which of the following statements is most correct?

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?

Overview of Financial Statement Analysis

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Filters

Exam 11: Equity Analysis and Valuation

If a company's return on equity is lower than its cost of equity capital, then the higher the dividend payout ratio the higher the P/E of the stock.

Pitfalls when forecasting earnings include failure to consider I. capital adequacy II. capacity constraints III. anticipated return on equity IV. new management

Alexas Corporation reports the following: Earnings per share \ 1.80 Dividends per share \ 0.72 Book Value per share-end of year \8 .62 -If Price to book value at the end of 2005 equals 1.00, then P/E ratio at end of 2003 equals (pick closest number):

The value of common stockholders' equity can be estimated as the present value of future abnormal earnings discounted at the cost of equity.

Which of the following would not be considered a component of business risk?

Which of the following is not a form of earnings management?

The price-to-book value of a company can be shown to be a function of future expected return on common stockholders' equity and risk of equity capital.

The number of shares outstanding a company has will affect its earnings per share and price/earnings ratio.

Which of the following statements concerning interim financial reports is incorrect?

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

The SEC has issued "safe harbor" rules to encourage forecasts by registrants, but it has had limited success.

The number of shares authorized a company has will affect its earnings per share ratio.

Variability in earning numbers:

Quality of earnings is generally lower the more liberal the accounting methods used by a company.

Adjustments to income statement numbers should be done following the estimation of the earnings persistence.

Business risk:

Which of the following statements is most correct?

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?

Overview of Financial Statement Analysis

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Filters