Question 1

The required earnings of the firm equals the product of the required rate of return on common equity capital times the __________________________________________________ at the beginning of the period.

Accepted Answer

The answer of The required earnings of the firm equals...

Question 2

______________________________ is the amount by which expected future earnings exceed the required earnings.

Accepted Answer

The answer of ______________________________ is the amount by which expected...

Question 3

Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are _________________________.

Accepted Answer

The answer of Accounting principles make accrual accounting earnings closer...

Question 4

Over the life of the firm,the present value of ______________________________,______________________________,and ____________________ will be the same.

Accepted Answer

The answer of Over the life of the firm,the present...

Question 5

The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.

Accepted Answer

The answer of The residual income_____________________________ valuation model uses __________________...

Question 6

In theory,all three valuation models,when correctly implemented with internally consistent assumptions,will produce the same estimates of value.However,in practice,which of the following errors can result in different value estimates?

Accepted Answer

All three errors, incomplete or inconsistent earnings and cash flow forecasts, inconsistent estimates of weighted average costs of capital, and incorrect continuing value computations, can result in different value estimates. Therefore, the best choice is D, which includes all of these errors.

Question 7

The two most popular discounted earnings models appear to be

Accepted Answer

The answer of The two most popular discounted earnings models...

Question 8

The residual income valuation model is a rigorous and straightforward valuation approach, but the analyst should be aware of all of the following implementation issues that will hinder its ability to measure firm value correctly except:

Accepted Answer

The residual income valuation model can be hindered by common stock transactions, portions of net income attributable to equity claimants other than common shareholders, and dirty surplus accounting items. However, a positive book value of equity is not an implementation issue that would hinder the model's ability to measure firm value correctly.

Question 9

Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.

Accepted Answer

The answer of Residual income valuation focuses on ____________________ as...

Question 10

The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows ________________________________________.

Accepted Answer

The answer of The residual income valuation approach assumes that...

Question 11

The value of a share of common equity should equal the present value of the _____________________________________________ the shareholders will receive.

Accepted Answer

The answer of The value of a share of common...

Question 12

In some industries,competitive dynamics eventually drive long-run projections of the future returns earned by the firm to an equilibrium level equal to the long-run expected cost of equity capital in the firm.At that point,a firm can be expected to earn ____________ residual income in the future.

Accepted Answer

If the long-run expected returns of the firm are equal to the long-run expected cost of equity capital, then the firm is not generating any excess profits or residual income. Therefore, the answer is option B, zero.

Question 13

Dirty surplus items in U.S.GAAP typically arise from all of the following except:

Accepted Answer

Dirty surplus items in U.S. GAAP typically arise from changes in investment security fair values, foreign currency exchange rates, and interest rates. Realized gains, on the other hand, are clean surplus items and are recognized in net income.

Question 14

Which of the following would likely be the most useful when valuing a dot.com company?

Accepted Answer

Dot.com companies are often in the growth stage and may not have a positive net asset value or pay dividends, making options A and B less useful. The discounted cash flow method is a commonly used valuation method for growth companies, as it takes into account expected future cash flows and the time value of money. The price-earnings method may also be useful, but it is important to compare the company's P/E ratio to industry benchmarks and consider any potential risks or uncertainties.

Question 15

Clean surplus accounting for most common stock transactions holds for shares accounted for at market value.An exception to this is:

Accepted Answer

Clean surplus accounting assumes that changes in equity are driven by operations and not by financing activities. Therefore, transactions such as repurchase of common shares and issuance of common shares to new shareholders in public exchanges would not affect the clean surplus. However, issuance of common equity shares for employee stock options exercises represents a financing activity that does not reflect operations and therefore violates the clean surplus principle.

Question 16

If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.

Accepted Answer

The answer of If an analyst expects a firm to...

Question 17

The foundation for residual income valuation is the classical _____________________________________________.

Accepted Answer

The answer of The foundation for residual income valuation is...

Question 18

Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.

Accepted Answer

The answer of Economists sometimes argue that earnings are not...

Question 19

Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?

Accepted Answer

Overuse of conventional financial statements is probably the least likely reason for acquirers to pay too much in an acquisition. Conventional financial statements are commonly used in due diligence for acquisitions, but they typically do not provide a complete picture of a company's value or potential future performance. Therefore, relying solely on financial statements is unlikely to result in an overpayment for an acquisition.

Question 20

Early in a period in which sales were increasing at a modest rate and plan expansion and start-up costs were occurring at a rapid rate,a successful business would likely experience

Accepted Answer

When sales are increasing at a modest rate but there are rapid expansion and start-up costs, the business is likely to experience decreased profits due to the cash shortage. The increase in costs may not be matched by an increase in revenue, leading to a negative impact on the cash flow. As a result, the business may require additional financing to cover the shortfall.

Quiz 13: Valuation: Earnings-Based Approaches