Equity Valuation

Question 1

The asset-based approach values a firm based on?

Answer 1

The asset-based approach values firm equity as the fair value of its assets minus the fair value of its liabilities.

Question 2

In general, firms making aggressive accounting decisions will report book values that are: high, or low , or fair value to market

Answer 2

In general, firms making aggressive (conservative) accounting decisions will report higher (lower) book values and lower (higher) future earnings.

Question 3

An argument for using the residual income (RI) valuation approach is that:

Answer 3

the models focus on economic rather than just on accounting profitability.

Question 4

An argument against for using the residual income (RI) valuation approach is that:

Answer 4

1) the clean surplus relation fails to hold.

2) the models rely on accounting data that can be manipulated by management.