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Which of the following is a disadvantage of using the price-to-book value (PBV) ratio? - correct answer Book values are affected by accounting standards, which may vary across firms and countries.
The sustainable growth rate, g, equals: - correct answer ...
Which of the following is a disadvantage of using the price-to-book value (PBV) ratio? - correct answer
Book values are affected by accounting standards, which may vary across firms and countries.
The sustainable growth rate, g, equals: - correct answer earnings retention rate
times the return on equity.
The present value of Raver Industries' projected residual income (RI) for the next five years is £60 per
share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of £11 per share,
which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year
5? - correct answer RI(5)/Ke
11/.12 = $91.62
If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF)
may be proxied by: - correct answer net income plus non-cash charges plus after-
tax interest.
The warranted or intrinsic price multiple is called the: - correct answer Justified =
Intrinsic
An argument for using the residual income (RI) valuation approach is that residual income valuation: -
correct answer reduces the problem of terminal value dominating total value.
Terminal value does not dominate total present value as is the case in dividend and free cash flow
valuation models. Both remaining responses are arguments against using the RI approach.
In computing free cash flow, the most significant non-cash expense is usually: - correct answer
Depreciation
,The trailing price-to-earnings (P/E) ratio is defined as: - correct answer Price to Most
Recent Earnings
Reported accounting data are most likely to bias an estimate of residual income when: - correct answer
standards allow charges directly to stockholders' equity while bypassing the income statement.
An argument against using the price-to-earnings (P/E) valuation approach is that: - correct answer
Earnings could be negative
Tri-coat Paints has a current market value of $41 per share with a earnings of $3.64. What is the present
value of its growth opportunities (PVGO) if the required return is 9%? - correct answer
PVGO =
$3..09 = 40.44
41 - 40.44 = 0.56
An argument for using the residual income (RI) valuation approach is that: - correct answer
the models focus on economic rather than just on accounting profitability.
An argument for using the price-to-earnings (P/E) valuation approach is that: - correct answer
research shows that P/E differences are significantly related to long-run average stock returns.
The two-stage (stable growth) free cash flow to equity (FCFE) and free cash flow to the firm (FCFF)
models typically assume: - correct answer high growth in free cash flow for n years
and then constant growth in free cash flow forever after.
An argument for using the price-to-earnings (P/E) valuation approach is that: - correct answer
earnings power is the primary determinant of investment value.
An argument against using the residual income (RI) valuation approach is that: - correct answer
the models rely on accounting data that can be manipulated by management.
, Gross income multiplier technique: - correct answer MV = gross income × income
multiplier.
If the three-stage dividend discount model (DDM) results in extremely high value, the: - correct answer
growth rate in the stable growth period is probably too high.
Most firms follow a pattern of growth that includes several stages. The second stage is most likely to be
referred to as the: - correct answer transitional stage.
Which of the following is one of the differences between FCFE and FCFF? FCFF does not deduct: - correct
answer Interest Payments to Bondholders
T or F: allocated common equity or book value is synonomous - correct answer True
The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an
asset's: - correct answer Intrinsic Value
When an analyst scrutinizes a firm's financial statements to try to discern how accurately the reported
information reflects economic reality, and to evaluate the sustainability of the company's performance,
the process is most likely to be referred to as a: - correct answer Quality of Earnings
Analysis
An argument against using the residual income (RI) valuation approach is that: - correct answer
the models rely on accounting data that can be manipulated by management.
FCFF = EBIT × (1 − tax rate) + Depreciation − Capital Expenditures − Change in Working Capital = 45.0 × (1
− 0.4) + 12.0 − 18.0 − 6.0 = 15.00. - correct answer True
The terminal value is: FCFF for year 4/(WACC - growth rate) = $40.62/(0.12 - 0.02) = $406.22 million in
terms of year 3 dollars. - correct answer True
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