You Are Analyzing Two Companies That Operate in the Same

You are analyzing two companies that operate in the same industry. They are both growing capital-intensive manufacturing companies, Guerr Corp. and Filk Corp. A diligent reading of their annual reports reveals the following:

You know that these accounting differences will affect the comparability of the two company's financial results.

Consider each of the above items (depreciation method, average depreciable lives and leases) separately and determine all other things being equal, whether the following ratios will be higher, lower or the same for Guerr when compared to Filk. Explain your answers.

i. Observed price-to-earning ratio in the initial years
ii. Price-to-free cash flow in the initial years
iii. Price-to-book value in the initial years

Correct Answer:

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