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54 Cards in this Set
- Front
- Back
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The corporate valuation approach uses basic accounting measures to assess the amount, timing, and
A. certainty of a company's past operating cash flows or earnings. B. certainty of a company's future non-operating cash flows or earnings. C. uncertainty of a company's future operating cash flows or earnings. D. uncertainty of a company's future non-operating cash flows or earnings. |
C
uncertainity of a companys futures operating cash flows or earnigns |
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The steps involved in corporate valuation are forecasting future values of some financial attribute that drives a company's value, determining the risk associated with that forecasted value, and determining the
A. future values of the value-relevant attribute. B. certain future value of earnings. C. present value of a company's earnings. D. discounted present value of the expected future amounts using a discount rate that reflects the risk or uncertainty |
D
discounted present value of the expected future amounts using a discount rate that reflects the risk or uncertainty |
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Cash flow assessment plays a central role in analyzing
A. the credit risk of a company. B. management's effectiveness. C. the future earnings potential of a company. D. the company's investment potential. |
A
credit risk of a company |
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Valuing an entire company, an operating division of that company, or its ownership shares involves three basic steps. These steps include all of the following except:
A. Forecasting future amounts of some financial attribute that ultimately determine how much a company is worth. B. Determining the risk or uncertainty associated with the forecast future amounts. C. Determining the discounted present value of the expected future amounts using an appropriate discount rate. D. Determining the dividends the company will pay in the future based on the company's dividend policy and expected future earnings. |
D
determining the dividends the company will pay in the future based on the companys dividend policy |
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According to the discounted free cash flow valuation model, the market value of common shares depends upon investors'
A. future expectations about the future economic prospects of free cash flows. B. current expectations about the future economic prospects of free cash flows. C. future expectations about the current economic prospects of free cash flows. D. current expectations about the current economic prospects of free cash flows. |
B current expectations about the future economic prospects of free cash flows
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A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This assumption is best applied to
A. start-up companies with stable cash flow patterns. B. growth companies with increasing cash flow patterns. C. growth companies with stable cash flow patterns. D. mature firms with stable cash flow patterns. |
D
mature firms with stable cash flow pattterns |
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To apply the discounted free cash flow approach, the analyst needs to estimate
A. net cash flows from operations for each and every future period, starting one year hence. B. free cash flows for each and every future period, starting one year hence. C. free cash flows for approximately ten years as the present value of cash flows occurring beyond that point are insignificant. D. net cash flows from operations for approximately ten years as the present value of cash flows occurring beyond that point are insignificant. |
B
free fash flows for each year and every period startiing one year hence |
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The FASB stresses that the primary objective of financial reporting is to provide information useful to investors and creditors in assessing the amount, timing, and uncertainty of future net cash flows. The FASB contends that
A. users pay attention to firms' accounting earnings because this accrual measure of periodic firm performance improves their ability to forecast companies' future cash flows. B. information about current cash receipts and payments is the most pertinent for this task. C. users pay attention to managements' estimates of free cash flows because this information improves their ability to forecast companies' future cash flows. D. current cash flows outperform current earnings in predicting future cash flows. |
A
users pay attention to firms accounting earnings because this accrual measure of periodic firm performance improves their ability to forecast companies future cash flows |
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Through the use of accruals and deferrals, accrual accounting
A. produces a cash flow number that smoothes out the unevenness in year-to-year earnings. B. produces information about current cash receipts and payments. C. enables management to estimate future free cash flows. D. produces an earnings number that smoothes out the unevenness in year-to-year cash flows. |
D
produces an earnings number that smoothes out the uneveness in year to year cash flows |
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Recent research indicates that stock returns correlate better with
A. accrual earnings than realized operating cash flows. B. cash basis earnings than realized operating cash flows. C. realized operating cash flows than accrual earnings. D. future operating cash flows than accrual earnings. |
A
accrual earnings than realized operating cash flows |
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The reciprocal of the risk-adjusted equity cost of capital used is the
A. return on assets. B. return on common equity. C. price earnings ratio. D. profit margin on sales. |
C
price earnings ratio |
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If a company currently earns $5.00 per share, and has a risk-adjusted cost of equity capital of 9%, a share of common stock should theoretically sell for
A. $0.45 B. $5.00 C. $48.00 D. $55.55 |
D
$55.55 EPS $5.00 cost of equity capital 9% = $55.55 |
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If a company currently earns $6.00 per share, and has a risk-adjusted cost of equity capital of 12.5%, a share of common stock should theoretically sell for
A. $0.75 B. $6.00 C. $48.00 D. $75.75 |
C
$48.00 EPS $6.00 cost of equity capital 12.5% = $48.00 |
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If most firms' price/earnings ratios are between 10 and 15, what is the range of average risk-adjusted equity cost of capital?
A. 6.67% to 10% B. 6.67% to 15% C. 10% to 15% D. 10% to 16.67% |
A
6.67% P/E = 1 r; 10 =1 r; r = 1 10; r = 10%. 15 = 1 r; r = 1 15; r = 6.67% |
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Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to that firm also having a high price/earnings ratio?
A. High earnings per share B. Low earnings per share C. Growth opportunities D. High risk and high P/E ratio cannot occur simultaneously. |
C
growth opportunities |
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To obtain a better current price, the net present value of future growth opportunities (NPVGO) can be calculated and
A. added to the price per share calculated from the P/E ratio. B. subtracted from the price per share calculated from the P/E ratio . C. multiplied by the price per share calculated from the P/E ratio . D. divided into the price per share calculated from the P/E ratio. |
A
added to the price per share caculated to the PE ratio |
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The net presentvalue of future growth opportunities will contribute to an above average P/E multiple when the retention rate (k) is
A. positive and the return on new investment is lower than the cost of equity capital. B. positive and the return on new investment is greater than the cost of equity capital. C. negative and the return on new investment is lower than the cost of equity capital. D. negative and the return on new investment is greater than the cost of equity capital. |
B
positive and the return on new investment is greater than the cost of equity capital |
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In general, the growth rate in earnings will depend on the portion of earnings reinvested each period and
A. the earnings retention rate. B. the rate of return earned on new investment. C. the company's cost of equity capital. D. the company's weighted average cost of capital. |
B
the rate of return earned on new investment |
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A component that is valuation-relevant, but is not expected to persist into the future is a
A. permanent earnings component. B. transitory earnings component. C. noise component. D. quiet component. |
B
transitory earnings component |
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Income from continuing operations, excluding special or nonrecurring items, is generally regarded as
A. permanent earnings. B. transitory earnings. C. value-irrelevant earnings. D. quiet. |
A
permenant earnings |
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Income or loss from discontinued operations is regarded as
A. permanent earnings. B. transitory earnings. C. value-irrelevant earnings. D. quiet. |
B
transitory earnings |
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Income or loss from discontinued operations is regarded as
A. permanent earnings. B. transitory earnings. C. value-irrelevant earnings. D. quiet. |
B
transitory earnings |
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table 6-1
The implied share price of Firm A's stock is A. $12.00 B. $48.00 C. $49.20 D. $54.40 |
C 49.20
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The implied share price of Firm B's stock is
A. $15.00 B. $45.00 C. $50.25 D. $55.25 |
C
50.25 |
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. The implied share price of Firm C's stock is
A. $18.00 B. $63.00 C. $72.00 D. $90.00 |
C
72 |
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The implied total earnings multiple of Firm A is
A. 1.00. B. 4.10. C. 5.00. D. 10.00 |
B
4.10 Implied earnings multiple = Implied share price EPS = $49.20 $12.00 = 4.1 |
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The implied total earnings multiple of Firm B is
A. 1.00. B. 3.00. C. 3.35. D. 12.00 |
C
3.35 Implied earnings multiple = Implied share price EPS = $50.25 $15.00 = 3.35 |
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The implied total earnings multiple of Firm C is
A. 1.00. B. 3.75. C. 4.00. D. 15.00 |
C
4.00 Implied earnings multiple = Implied share price EPS = $72.00 $18.00 = 4.00 |
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Reported earnings numbers often contain three distinctly different components, each subject to a different earnings capitalization rate. Which of the following is not one of these components?
A. A permanent earnings component. B. A transitory earnings component. C. A restructured earnings component. D. A value-irrelevant earnings component |
C
a restructured earnings component |
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Which one of the following is an example of sustainable earnings?
A. Loss from debt retirement. B. Expenditures for advertising. C. Earnings from repeat customers. D. Gain from corporate restructuring. |
C
earnings from repeat customers |
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As transitory components become a more important part of a firm's reported earnings, the reported earnings
A. become a more reliable indicator of sustainable cash flows. B. are more quality enhanced. C. are a more reliable indicator of fundamental value. D. are a less reliable indicator of sustainable cash flows. |
D
are less reliable indicator of sustainable cash flows |
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The assessment of earnings quality is best accomplished through the use of which one of the following?
A. Single-step financial statements. B. Balance sheet and cash flow statement. C. Multi-step income statement, balance sheet, and cash flow statement. D. Single-step income statement, balance sheet, and cash flow statement |
C
multistep income statement balance sheet and cash flow statement |
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As transitory or value-irrelevant components become a larger part of a firm's reported earnings, which of the following effects would you not expect to witness?
A. The quality of those reported earnings is eroded. B. The firm's stock price rises in the year such compenents are reported proportionate to their impact on income. C. Reported earnings become a less reliable indicator of the company's long-run sustainable cash flows. D. Earnings are a less reliable indicator of the firm's fundamental value. |
B
the firms stock price rises in the year such components are reported to their impact on income |
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According to the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that
A. earn less than the cost of equity capital. B. produce negative abnormal earnings. C. produce positive abnormal earnings. D. earn an amount equal to the equity cost of capital. |
C
produce positive abnormal earnings |
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Firms that earn less than the cost of equity capital have a share price
A. above the market average. B. equal to book value. C. above book value. D. below book value. |
D
below book value |
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The price of equity at time 0 is equal to the
A. book value of equity at time 0. B. expected abnormal earnings in all future periods. C. book value of equity at time 0 plus expected abnormal earnings in all future periods divided by discount factors for all future periods. D. book value of equity at time 0 minus expected abnormal earnings in all future periods divided by discount factors for all future periods. |
C
book value of equity at time 0 plus expected abnormal earnings in all future periods divided by discount factors for all future periods |
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What will be the expected abnormal earnings of a firm which has NOPAT of $40,000 with an equity cost of capital of 10%, when the book value at the beginning of period is $800,000?
A. $(40,000) B. $(80,000) C. $40,000 D. $80,000 |
A (40,000)
Abnormal earnings = NOPAT - (equity cost of capital book value) = $40,000 - (.10 $800,000) = -$40,000 |
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Table 6-2
What are the abnormal earnings for Firm A? A. $(4,000) B. $(6,000) C. $4,000 D. $6,000 |
A (4000)
Abnormal earnings = NOPAT - (equity cost of capital book value) = $6,000 - (.10 $100,000) = -$4,000 |
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table 6-2)
What are the abnormal earnings for Firm B? A. $1,000 B. $2,000 C. $12,000 D. $14,000 |
B
2000 Abnormal earnings = NOPAT - (equity cost of capital book value) = $14,000 - (.08 $150,000) = $2,000 |
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table 6-2?
What are the abnormal earnings for Firm C? A. $(2,400) B. $(4,800) C. $4,800 D. $9,600 |
B
(4800) Abnormal earnings = NOPAT - (equity cost of capital book value) = $18,000 - (.12 $190,000) = -$4,800 |
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Assume that Firm A can increase NOPAT by $4,000, by cutting costs. Abnormal earnings would be
A. $(1,000) B. $0 C. $1,000 D. $1,500 |
B
0 Abnormal earnings = NOPAT - (equity cost of capital book value) = ($6,000 + $4,000) - (.10 $100,000) = $0 |
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Assume that Firm B can divest itself of $20,000 of unproductive capital with NOPAT falling by only $3,000. Abnormal earnings are
A. $200 B. $400 C. $600 D. $800 |
C
600 Abnormal earnings = NOPAT - (equity cost of capital book value) = ($14,000 - $3,000) - (.08 ($150,000 - $20,000)) = $600 |
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A company with a return on equity that consistently exceeds the industry average ROE will generally have shares that sell at a
A. market-to-book ratio equal to the industry average . B. lower market-to-book ratio than the industry average. C. higher market-to-book ratio than the industry average. D. higher market price than its competitors |
C
higher market to book ratio than the industry average |
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Prior to the announcement of bad news earnings (a negative earnings surprise), stock returns exhibit
A. a negative drift downward.
B. no change in stock returns.
C. a negative drift downward followed by an immediate upward drift.
D. a positive drift upward.
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A
a negative drift downward |
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An earnings surprise
A. usually precedes a negative drift downward in a company's stock price. B. means that some bias must exist (as unbiased means that the market's earnings expectations will be correct). C. demonstrates the inherent inefficiency of securities markets. D. occurs when earnings deviate from investors' expectations. |
D
occurs when earnigs deviate from investors expectations |
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The fact that a company's stock price does not change when earnings are announced indicates that
A. earnings were the same (per share) as in the previous quarter. B. the securities markets are rationale and efficient. C. the information contained in the earnings release was fully anticipated by investors. D. earnings deviate from investors' expectations |
C
the information contained in the earngins relase was fully anticipated by investors |
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The interest rate on a revolving loan will usually
A. be below prime interest. B. be equal to prime interest. C. remain fixed. D. float. |
D
float |
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Short-term notes sold directly to investors by large, highly rated companies are called
A. commercial paper. B. secured notes. C. bonds. D. debentures |
A
commercial paper |
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A bond that is considered unsecured is referred to as a
A. debenture. B. sinking fund bond. C. senior bond. D. callable bond. |
A
debentuate |
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A qualitative assessment of the business, its customers and suppliers, and management's character and capability is known as
A. covenant waivers. B. due diligence. C. indenture evaluation. D. a debenture. |
B
due dilligence |
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The degree to which cash needs can be satisfied during periods of fiscal stress is known as
A. credit availability. B. credit worthiness. C. working capital. D. financial flexibility |
D
financial flexibility |
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Operating cash flows are typically negative for
A. established growth companies. B. emerging companies. C. mature companies. D. blue-chip companies. |
B
emerging companies |
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As per SFAS No. 157, fair value—for accounting purposes—is
A. an entry price. B. an exit price. C. the market price in a forced sale. D. always easily determinable |
B
an exit price |
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The interest rate charged on bank loans must be sufficient to cover all of the following except
A. a risk premium when loans are personally guaranteed by the borrower. B. the lender's cost of borrowing funds. C. the costs of administering, monitoring, and servicing the loan. D. a premium for exposure to default risk. |
A
a risk premium when loans are personally guaranteed by the borrower |
