Question 1

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 2

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 3

The foundation for residual income valuation is the classical _____________________________________________.

Accepted Answer

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

Question 4

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

Accepted Answer

Dirty surplus items are those that bypass the income statement and are recorded directly in shareholders' equity. The items listed in choices A, B, and C (changes in investment security fair values, foreign currency exchange rates, and interest rates) can all result in dirty surplus items. However, realized gains are recorded on the income statement and therefore do not give rise to dirty surplus items.

Question 5

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 positive book value of equity does not hinder the residual income valuation model's ability to measure firm value correctly. The other options listed, such as common stock transactions, non-common shareholder equity claims, and dirty surplus accounting items, can have significant impacts on the accuracy of the model's valuation.

Question 6

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 7

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 8

The ______________________________ valuation model uses expected future net income and the book value of common shareholders' equity as the basis for valuation.

Accepted Answer

The answer of The ______________________________ valuation model uses expected future...

Question 9

The two most popular discounted earnings models appear to be

Accepted Answer

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

Question 10

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

Accepted Answer

When common equity shares are issued for employee stock options exercises, the market value of the shares may not accurately reflect their true value. Therefore, this transaction is an exception to clean surplus accounting. Repurchase of common shares does not affect clean surplus accounting because it is simply a reallocation of equity among shareholders. Issuance of common shares to new shareholders in public exchanges is also accounted for at market value and does not affect clean surplus accounting.

Question 11

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

Accepted Answer

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

Question 12

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 13

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

When the long-run projections of future returns earned by a firm reach an equilibrium level equal to the long-run expected cost of equity capital in the firm, the firm can be expected to earn zero residual income in the future. This is because the returns earned by the firm will just be enough to cover the cost of capital, leaving no excess returns or residual income.

Question 14

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 15

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.

Question 16

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 17

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 the least likely reason for acquirers to pay too much in an acquisition as financial statements are usually scrutinized carefully during due diligence and are less likely to be the sole driver of overpayment. Overbidding, over optimistic appraisal of market potential, and over estimation of synergies are more likely to cause overpayment as they involve factors that are difficult to accurately predict or quantify.

Question 18

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 of these errors can potentially result in different value estimates. Incomplete or inconsistent earnings and cash flow forecasts can lead to different estimated cash flows, which will affect the overall valuation. Inconsistent estimates of weighted average costs of capital will affect the discount rate used to calculate the present value of those cash flows. And incorrect continuing value computations can inaccurately forecast the future value of the company beyond the projection period. All of these factors can impact the final estimated value, making it important to ensure all assumptions are internally consistent and accurate.

Question 19

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

Accepted Answer

Discounted cash flow is the most useful metric for valuing a dot.com company because it takes into account the company's future cash flow projections and discounts them back to their present value. This is particularly important for dot.com companies, which may not have a long track record of profitability or assets on their balance sheet that can be used for valuation. Net asset value, dividend yield, and price-earnings ratios are more applicable to traditional companies with established earnings and assets.

Question 20

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...

Quiz 13: Valuation: Earnings-Based Approaches