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Exam 14: Valuation: Market-Based Approaches

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Question 1

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In the value-to-book model growth adds value to shareholders only if the growth is ________________________________________.

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abnormally...

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Question 2

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The price differential,or the amount by which the market has discounted share price for risk,is calculated by

A) subtracting the book value from the residual income model book value calculated using the risk free rate.
B) subtracting the market price from the residual income model price calculated using the risk free rate.
C) multiplying the theoretical price-earnings ratio by the market price.
D) subtracting the residual income model price calculated using R_E from the residual income model price calculated using the risk free rate.

E) A) and D)
F) A) and B)

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Question 3

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Discuss how risk and profitability factors cause differences in price-earnings ratios across firms.

Sometimes a high market-to-book ratio is a result of having __________________________________________________.

Assuming that Ska's cost of equity capital is 14% and it expects to grow earnings at a rate of 8% per year,we would expect Ska's P/E ratio to be

The use of P/E ratios in valuation can result in measurement bias.What two items can result in measurement error and why?

The PEG ratio does not take into account differences in ____________________ and ________________________________________ across firms.

The risk of the firm increases the _____________________________________________.

Companies value-to-book and market-to-book ratios may differ due to accounting reasons.An example of an accounting reason that would create a difference is

Wolverwine Company's current stock price is $45 per share and the company's trailing earnings per share were $2.12.Given that analysts are forecasting growth of 14% for Wolverwine,what is the company's PEG ratio?

Which of the following ratios usually reflects investor's opinions of the future prospects for the firm?

Book value per share may not approximate market value per share because:

To estimate security's risk-neutral value we can use the _____________________________________________ and risk-free rates of return.

What is the value of reverse engineering stock prices? How does the process work?

Economics teaches that,in equilibrium,firms will earn a return equal to the ______________________________.

Under the value-to-book model a firm in steady state equilibrium earning ROCE = R_E will

Which of the following is not a reason why price-earnings ratios would differ across firms?

Assume an analyst is evaluating a firm with $1,000 of book value of common equity and a cost of equity capital equal to 8 percent.Assume that the analyst forecasts that the firm will earn ROCE of 14 percent until year 2016,when the firm will start earning ROCE equal to 8 percent.The company pays no dividends and will not engage in any stock transactions.Use this information to complete the following table and calculate the firm's value-to-book ratio.

Explain the analysts' role in making the capital markets efficient.

Strictly speaking,the price-earnings ratio assumes that firm value is the