Question 1

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 result in different value estimates. Incomplete or inconsistent earnings and cash flow forecasts can lead to inaccurate estimates of future cash flows, which affects the discounted cash flow valuation. Inconsistent estimates of weighted average costs of capital can affect both the discounted cash flow valuation and the dividend discount model. Incorrect continuing value computations can affect the discounted cash flow valuation. Therefore, all three valuation models can be affected by these errors resulting in different value estimates.

Question 2

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 3

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

Accepted Answer

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

Question 4

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 5

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

Accepted Answer

Dot.com companies typically have a high growth potential and may not have significant assets or pay dividends, so traditional valuation methods like net asset value and dividend yield may not be useful. Discounted cash flow takes into account the expected future cash flows of the company, which is important for high-growth companies like dot.coms. Price-earnings may also be used as a valuation method, but it assumes that the company generates profits, which may not be the case for all dot.coms.

Question 6

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 7

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 is designed to handle positive book values of equity, so it will not hinder its ability to measure firm value correctly. However, it may be hindered by common stock transactions, portions of net income attributable to equity claimants other than common shareholders, and dirty surplus accounting items, as these may not accurately reflect the true economic value of the firm.

Question 8

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

Accepted Answer

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

Question 9

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 because financial statements are used to evaluate the financial viability of an acquisition and are typically not the sole basis for determining the purchase price. Overbidding, over optimistic appraisal of market potential, and over estimation of synergies are more likely reasons for overpaying in an acquisition as they involve inflated expectations or miscalculations about the value of the target company.

Question 10

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 11

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 future returns earned by the firm reach an equilibrium level equal to the long-run expected cost of equity capital, there will be no excess returns or residual income. Therefore, the answer is zero.

Question 12

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 in exchange for employee stock options exercises, the price at which the options were granted would be below market value. Therefore, the use of market value for accounting purposes would lead to a distortion in the calculation of the clean surplus. The other options (B and C) are accounted for at market value and therefore do not pose an exception to clean surplus accounting. Option D is not correct as there is at least one exception to clean surplus accounting.

Question 13

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 14

The two most popular discounted earnings models appear to be:

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

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

During a period of increasing sales but also significant expansion and start-up costs, a successful business may experience decreased profits due to the cash shortage created by these costs. This would require increased financing to cover the shortfall in cash flow.

Question 17

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 typically viewed as clean items and do not fall under the category of dirty surplus items.

Question 18

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 19

The foundation for residual income valuation is the classical _____________________________________________.

Accepted Answer

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

Question 20

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...

Quiz 13: Valuation: Earnings-Based Approaches