CE Flashcards
Which of the following items are required to produce a forecasted future condensed income statement?
A. Tax rate; NOPAT margin; revenue growth; interest rate on ending debt
B. Tax rate; asset turnover; NOPAT margin; revenue growth
C. NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt; leverage ratio
D. Tax rate; NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt
D. Tax rate; NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt
Consider the following statement: “Revenue growth tends to revert faster to its economy-wide average than operating asset turnover.” This statement is
True
Consider the following statement: “Return on net operating assets tends to revert faster to its economy-wide average than financial leverage.” This statement is
True
Consider the following statement: “Financial leverage tends to revert faster to its economy-wide average than financial spread.” This statement is
False
In cyclical industries, revenue growth
A. Tends to move in line with economy-wide growth
B. Tends to approach zero
C. Tends to be negative during economic upturns
D. Consistently exceeds economy-wide growth
A. Tends to move in line with economy-wide growth
Consider the following statement: “The Foster model does not take into account that quarterly earnings may exhibit a seasonal pattern.” This statement is
False
. Consider the following statement: “The abnormal profit growth valuation model differs from the free cash flow and abnormal profits valuation models in that it is not mathematically equivalent to the dividend discount model.” This statement is
False
Consider the following statement: “The discounted abnormal NOPAT growth model defines the value of net operating assets as the sum of the capitalized next-period NOPAT forecast and the present value of forecasted NOPAT beyond the next period.” This statement is
True
Consider the following statement: “A disadvantage of the abnormal profits valuation model is that it produces lower equity value estimates for firms that use conservative accounting policies (such as accelerated depreciation) than for firms that use aggressive accounting policies (such as straight-line depreciation).” This statement is
False
Consider the following information about three industry peers:
ROE Price-to-book ratio Price-earnings ratio
Peer 1 20% 0.2 5
Peer 2 10% 1 10
Peer 3 25% 1 5
Which of the following statements about these industry peers is correct?
A. Investors expect that the return on equity of the currently best performing peer is not sustainable in the future.
B. Investors expect that the return on equity of the currently worst performing peer will improve in the future.
C. Investors expect that peer 1’s future abnormal profit growth will be positive.
D. Statements A and C are correct.
E. None of the above statements is correct.
A. Investors expect that the return on equity of the currently best performing peer is not sustainable in the future.
Consider the following statement: “The equity value-to-book ratio is a function of (a) future returns on equity, (b) future book value of equity growth rates, and (c) the cost of equity.” This statement is
True
Some researchers argue that the firm size effect on the cost of equity capital has disappeared. This would imply that
A. The cost of equity capital of small firms is no longer systematically lower than that of large firms.
B. The equity beta of small firms is no longer systematically greater than that of large firms.
C. The equity beta of small firms is no longer systematically lower than that of large firms.
D. None of the above.
D. None of the above.
Statement I: “An (indirect) asset-based approach to valuing equity always produces the same equity value estimate as a (direct) equity-based approach to valuing equity.”
Statement II: “An (indirect) asset-based approach to valuing equity is more accurate than the equity-based approach if (a) discount rates are held constant but (b) leverage is expected to change significantly over the forecast horizon.”
A. Only statement I is true.
B. Only statement II is true.
C. Both statements are false.
B. Only statement II is true.
