Exam 11: Equity Analysis and Valuation

Quality of earnings is said to be high if analysts' earnings forecasts have a small standard deviation.

A stock that has a low price/earnings ratio and a low price/book value ratio is an indicator of a stock that is expected to have slow or negative growth in earnings and a low return on common stockholders' equity.

Extrapolation is one of the more useful analytical tools.

Although growth is often touted as one of the key drivers of the value of a stock, no amount of growth will increase the value of a company if its return to providers of capital is less than the cost of that capital.

The SEC requires only quarterly financial reports to be filed (Form 10-Q).

The price/earnings ratio would be expected to increase as the cost of equity capital increases, all other things equal.

Interim financial reports are generally prepared using the same accounting methods as used for the annual financial reports.

Earnings management uses acceptable accounting reporting principles for purposes of reporting specific results.

The quality of earnings is a measure of the difference between this year's earnings and last year's earnings.

Problem Three: Analyzing Earnings Earnings are extremely important to a publicly traded company and the creditors and investors of that company. However, looking at earnings without regard to the quality of those earnings is hazardous to the health of creditors and investors. a. Why is the determination of earnings quality and persistence important? b. Explain recasting of the income statement and give three examples of items that are recasted. c. Explain adjusting of the income statement and give three examples of items that are recasted.

If a company has a price to book value ratio that is less than one this implies that future expected return on equity is less than required return on equity.

A profitable high-tech company would generally have

Company A and Company B operate in the same industry. Company B has a price to book value that is much higher than A's. Both companies have price to book value ratios greater than one. Which of the following could explain this difference, all else equal?