財(cái)務(wù)報(bào)表分析（英文版·第11版）測(cè)試題TestBank Chap011 Equity Analysis and Valuation

11-

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Chapter11

EquityAnalysisandValuation

MultipleChoiceQuestions

1.

Whichofthefollowingisnotincludedinthedefinitionofearningspersistence?

A.

Stabilityoftheearnings

B.

Magnitudeoftheearnings

C.

Predictabilityoftheearnings

D.

Theearnings'trend

2.

Whichofthefollowingisnotafactorinproducingearningsforecasts?

A.

Estimatingthelevelofdividends

B.

Separationofrecurringandnonrecurringcomponents

C.

Recognizingpotentialearningsmanagement

D.

Recognizingpotentialincomesmoothing

3.

Whichofthefollowingisnotaformofearningsmanagement?

A.

Changesinaccountingassumptions

B.

Timingrevenuerecognition

C.

Write-downsofoperatingassets

D.

Reportingfictitioustransactions

4.

Pitfallswhenforecastingearningsincludefailuretoconsider:

I.capitaladequacy.

II.capacityconstraints.

III.anticipatedreturnonequity.

IV.newmanagement.

A.

IandIII

B.

IIandIV

C.

I,III,andIV

D.

I,II,andIII

5.

Whichofthefollowingcanaffectearningsquality?

I.Management'schoiceofaccountingprinciple

II.Management'schoiceofdividendpolicy

III.Management'sestimates

IV.Management'sdiscretionaryexpenditures

A.

I,II,III,andIV

B.

I,II,andIII

C.

I,III,andIV

D.

IandIII

6.

Whichofthefollowingstatementsconcerningqualityofearningsiscorrect?

A.

Allotherthingsbeingequal,themorecyclicaltheindustrywithinwhichacompanyoperates,theloweritsqualityofearnings.

B.

Thesmoothertheearningsstreamofacompany,thegreaterthequalityoftheearnings.

C.

Qualityofearningsisindependentofbusinessrisk.

D.

Qualityofearningsislargelybeyondmanagement'scontrol.

7.

Agrowingcompanywithdisappointingprofitabilitywouldgenerallyhave:

A.

highprice-to-bookratioandhighprice-to-earningsratio.

B.

highprice-to-bookratioandlowprice-to-earningsratio.

C.

lowprice-to-bookratioandhighprice-to-earningsratio.

D.

lowprice-to-bookratioandlowprice-to-earningsratio.

8.

Whenassessingearningspersistence,itisimportanttoanalyzediscretionaryexpenditures.Whichofthefollowingiscorrect?

I.Researchanddevelopmentisgenerallyconsideredadiscretionaryexpenditure.

II.Decreaseddiscretionaryexpendituresshouldalwaysbetakenasapositiveindicatorthatthecompanyisgettingcostsundercontrol.

III.Advertisingexpenditurescanbeconsidereddiscretionaryexpenditures,whichoftenhaveimplicationsforfuturesales.

IV.Absolutelevelsofdiscretionaryexpendituresaremoreimportantthanthelevelofexpendituresrelativetosales.

A.

I,II,andIII

B.

I,III,andIV

C.

II,III,andIV

D.

IandIII

9.

Whichofthefollowingshouldbeattemptedinordertogaugethequalityofacompany'searnings?

I.Assessinganadequacyofdiscretionaryexpenditures

II.Assessingdegreeofconservatisminreportingassets

III.Assessingdegreeofconservatisminreportingliabilities

IV.Assessingdegreeofconservatisminapplicationofaccountingprinciples

A.

I,II,III,andIV

B.

I,II,andIV

C.

II,III,andIV

D.

I,III,andIV

10.

Whichofthefollowingfactorsisleastlikelytoaffectearningspersistence?

A.

Changingpricelevels

B.

Extraordinaryitems

C.

Usualoperatingcosts

D.

Accountingmethodsused

11.

Whichofthefollowingisnotatypicalformofearningsmanagement?

A.

Changingaccountingestimates

B.

Offsettingone-timegainsandlosses

C.

Changingaccountingprinciples

D.

Changingauditors

12.

Whenconsideringthedeterminantsoftheprice-to-bookratio(PB)whichofthefollowingiscorrect?

I.Allotherthingsbeingequal,thegreateracompany'sreturnoncommonstockholders'equity,thegreaterthePBratio.

II.Allotherthingsbeingequal,thegreateracompany'scostofequity,thegreaterthePBratio.

III.Ifacompany'sreturnoncommonstockholders'equityequalsitscostofequity,thePBratioshouldequal1.

IV.Thegreateracompany'scurrentearningsthehigherthePBratio.

A.

I,III,andIV

B.

IandIII

C.

IIandIV

D.

IandII

13.

Youareanalyzingastock.Youexpectthatearningswillgrowquicklyrelativetoitscurrentlevel,buttheexpectedreturnoncommonstockholders'equityislow.Assumingpricetobeconstant,whatlevelsoftheprice-to-earningsratio(PE)andtheprice-to-bookratio(PB)wouldyouexpecttosee?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

14.

FristyCorporationhasabookvalueofequityof$5,000atthebeginningof2005,andnetincomeof$1,000foryearended2005.Itpaysnodividends,anditscostofequitycapitalis10%.Itexpectsreturnonbeginningofyearequitytoremainconstantfor2006and2007anddecreaseto10%thereafter.Whatshoulditsprice-to-bookratiobeattheendof2005(pickclosestnumber)?

A.

1.01

B.

1.05

C.

1.09

D.

1.19

15.

ABCCorporationandDEFCorporationoperateinthesameindustry.ABChasaPEratiothatis50%higherthanDEFCorporation.WhichofthefollowingaccountsforsomeofthedifferenceintheobservedPEratios?

I.ABCusesmoreconservativeaccountingprinciples.

II.ABChasahighercostofequitycapital.

III.ABChashigherexpectedfuturegrowth.

IV.DEFusesFIFOandABCusesLIFO.

A.

I,II,III,andIV

B.

I,III,andIV

C.

IandIII

D.

II,III,andIV

16.

Aprofitablehigh-techcompanywouldgenerallyhave:

A.

highprice-to-bookratioandhighprice-to-earningsratio.

B.

highprice-to-bookratioandlowprice-to-earningsratio.

C.

lowprice-to-bookratioandhighprice-to-earningsratio.

D.

lowprice-to-bookratioandlowprice-to-earningsratio.

17.

Aprofitablematurecompanywouldgenerallyhave:

A.

highprice-to-bookratioandhighprice-to-earningsratio.

B.

highprice-to-bookratioandlowprice-to-earningsratio.

C.

lowprice-to-bookratioandhighprice-to-earningsratio.

D.

lowprice-to-bookratioandlowprice-to-earningsratio.

AlexasCorporationreportsthefollowing:

18.

Ifprice-to-bookratioattheendof2005equals1.00,andreturnonbeginningofyearequityisexpectedtoremainconstant,thencostofequity(tonearestpercent)equals:

A.

15%.

B.

21%.

C.

24%.

D.

Notdeterminable

19.

Ifprice-to-bookratioattheendof2005equals1.00,thenPEratioatendof2004equals(pickclosestnumber):

A.

8.38.

B.

4.78.

C.

4.19.

D.

Notdeterminable

20.

Analysts'expectedearningsforAlexasfornexttwoyearsare:

2006:$2.00

2007:$2.23

Costofequityis15%.Returnonequityisexpectedtoequalcostofequityfrom2008onwards.Dividendpayoutratioisexpectedtoremainthesamefor2006and2007.Pricepershareattheendof2005wouldbeclosestto:

A.

$9.45.

B.

$9.81.

C.

$9.89.

D.

Notdeterminable

21.

Variabilityinearningnumbers:

A.

isdesirableasitincreasesvarianceofearningsandhencevalueofstockoptions.

B.

increasesifacompanydecreasesitsoperatingexpenses.

C.

increasesifacompanydecreasesitsfinancialleverage.

D.

isindependentofoperatingleverage.

22.

Aretrenchingcompanywithpoorprospectswouldgenerallyhave:

A.

highprice-to-bookratioandhighprice-to-earningsratio.

B.

highprice-to-bookratioandlowprice-to-earningsratio.

C.

lowprice-to-bookratioandhighprice-to-earningsratio.

D.

lowprice-to-bookratioandlowprice-to-earningsratio.

23.

CompanyAandCompanyBoperateinthesameindustry.CompanyBhasaprice-to-bookratiothatismuchhigherthanA's.Bothcompanieshaveprice-to-bookratiosgreaterthanone.Whichofthefollowingcouldexplainthisdifference,allelseequal?

A.

Auseslessconservativeaccountingmethods.

B.

Ahaslowerexpectedfuturedividendpayoutratio.

C.

Ahashigherexpectedgrowth.

D.

Ahasmanymoresharesoutstanding.

24.

Interimfinancialreports:

A.

arenotrequiredbySEC.

B.

areasreliableasannualreports.

C.

requireallocationofcertaindiscretionarycostsacrossinterimperiods.

D.

normallyuseFIFOinventoryreporting,regardlessofmethodusedforannualreports.

25.

Whichofthefollowingstatementsconcerninginterimfinancialreportsisincorrect?

A.

Accrualaccountingisusedforrevenueandexpenserecognition.

B.

Extraordinaryitemsarereportedinannualbutnotinterimfinancialreports.

C.

LIFOliquidationisnotreportedforinterimpurposes,unlessdeclineininventoryisexpectedtobepermanent.

D.

Incometaxesareaccruedusingeffectivetaxrateexpectedfortheannualperiod.

26.

Whichofthefollowingshouldbeconsideredwhenexaminingasoftwaredevelopmentcompany'searningspersistence?

I.Changesinaccountingestimates

II.Amountspentonsoftwaredevelopment

III.Gainsfromsaleofmarketablesecurities

IV.Managerialcompensation

A.

I,II,III,andIV

B.

I,II,andIII

C.

I,II,andIV

D.

I,III,andIV

27.

Whenexaminingquarterlyresultsofacompanyinaseasonalbusiness,itisusefulto:

A.

comparetotheprecedingquarter.

B.

matchthecompany'sresultsagainsteconomicstatistics.

C.

comparetothesameperiodintheprioryear.

D.

analyzeusingapercentageincomestatement.

HuptaCorporation

28.

Netincomeisexpectedtoincreaseby10%forthenextyear,anddividendpayoutratioisexpectedtoremainconstant.After2006,residualearningsareexpectedtodecreasetozero.Usingtheearnings-basedvaluationmethod,whatisthevaluepershareofHuptastockasof12/31/05?

A.

$33.60

B.

$33.27

C.

$32.73

D.

$30.00

29.

Usingthedividenddiscountmodel,assumingdividendsgrowat10%in2006andat5%thereafter,whatisthevaluepershareofHuptaat12/31/05?

A.

$48.20

B.

$44.00

C.

$40.18

D.

$40.00

30.

Whichofthefollowingstatementsismostcorrect?

A.

IftwocompanieshavethesameROEandthesamerisk,theymusthavethesameresidualincome(abnormalearnings)fortheyear.

B.

Iftwocompanieshavethesamenetbookvalueandthesameresidualincomethisyear,thentheirstockpricesmustbethesame.

C.

IftwocompanieshavethesameROEandthesamestockprice,theirearningsmustbethesamefortheyear.

D.

IftwocompanieshavethesameROE,netbookvalue,andcostofcapital,thentheirresidualincomemustbethesamefortheyear.

31.

Twocompanies,AandB,havethesameROEs,butCompanyAhasahigherresidualincome.Whichofthefollowingwouldexplainthis,allelseequal?

A.

CompanyAisriskierthanCompanyB.

B.

CompanyAhashigherexpectedfuturegrowth.

C.

CompanyAhasgreaternetbookvalue.

D.

CompanyAhaslowerROA.

32.

Ifacompanyhasahighprice-to-bookratio(PB)andlowprice-to-earnings(PE)ratio,thissuggeststhat:

A.

earningsareexpectedtogrowslowlyordeclinerelativetocurrentlevel,withlowexpectedreturnoncommonstockholders'equity(ROCE).

B.

earningsareexpectedtogrowquicklyrelativetocurrentlevel,butwithlowexpectedROCE.

C.

earningsareexpectedtogrowslowlyordeclinerelativetocurrentlevel,butwithhighexpectedROCE.

D.

earningsareexpectedtogrowquicklyrelativetocurrentlevel,withhighexpectedROCE.

33.

Whichofthefollowingwillaffectobservedprice-to-earningsratio(laggedratio):

I.Qualityofearnings

II.Businessrisk

III.Riskfreerateofinterest

IV.Expectedgrowth

A.

I,II,III,andIV

B.

II,III,andIV

C.

IIandIV

D.

I,II,andIV

34.

Whichofthefollowingwillaffectobservedprice-to-bookratio?

I.ExpectedROCE

II.Businessrisk

III.Riskfreerateofinterest

IV.Expectedgrowth

A.

I,II,III,andIV

B.

II,III,andIV

C.

IIandIV

D.

I,II,andIV

35.

Whichofthefollowingisleastlikelytoaffectanalysisofearningspersistence?

A.

Managerialcompensation

B.

Changesinaccountingprinciple

C.

Cyclicalityofbusiness

D.

Seasonalityofbusiness

True/FalseQuestions

36.

Toproduceareliableforecastofearnings,ananalystmustfirstseparatethepersistentcomponentsofearningsfromthenonrecurringcomponents.

True

False

37.

Adjustingearningsincludesassigningearningscomponentsfromtherecastincomestatementstoperiodstheylikelybelong.

True

False

38.

Adjustmentstoincomestatementnumbersshouldbedonefollowingtheestimationoftheearningspersistence.

True

False

39.

Earningsmanagementusesacceptableaccountingreportingprinciplesforpurposesofreportingspecificresults.

True

False

40.

Qualityofearningsissaidtobehighifanalysts'earningsforecastshaveasmallstandarddeviation.

True

False

41.

Themoreliberaltheaccountingmethodsusedbyacompany,thelowerthequalityofearnings.

True

False

42.

Thequalityofearningsisaffectedbythevolatilityofacompany'ssales.

True

False

43.

Thequalityofearningsisameasureofthedifferencebetweenthisyear'searningsandlastyear'searnings.

True

False

44.

Atypicaltimehorizonformeasuringearningspoweris5years.

True

False

45.

TheSECrequiresmonthlyfinancialreportstobefiled(Form10-M).

True

False

46.

TheSECrequiresonlyquarterlyfinancialreportstobefiled(Form10-Q).

True

False

47.

Whenassessingearningspersistence,itisimportanttodetermineiftherehasbeenanyearningsmanagement.

True

False

48.

Interimfinancialreportsaregenerallypreparedusingthesameaccountingmethodsasusedfortheannualfinancialreports.

True

False

49.

Theprice-to-bookratioofacompanycanbeshowntobeafunctionoffutureexpectedreturnoncommonstockholders'equityandriskofequitycapital.

True

False

50.

Astockthathasahighprice-to-earningsratioandahighprice-to-bookratioisanindicatorofastockthatisdefinitelyovervalued.

True

False

51.

Astockthathasalowprice-to-earningsratioandalowprice-to-bookratioisanindicatorofastockthatisexpectedtohaveslowornegativegrowthinearningsandalowreturnoncommonstockholders'equity.

True

False

52.

Thevalueofcommonstockholders'equitycanbeestimatedasthepresentvalueoffutureabnormalearningsdiscountedatthecostofequity.

True

False

53.

Althoughinterimfinancialreportsarenormallypreparedusingthesameaccountingmethodsastheannualfinancialreportstheyaregenerallylessreliable,inpartbecauseoftheincreaseduseofestimatesintheinterimperiods.

True

False

54.

Allotherthingsbeingequal,theprice-to-earningsratiowouldbeexpectedtoincreaseasthecostofequitycapitalincreases.

True

False

55.

Thehigherthedividendpayoutratio,thelowerthePEratioofthestock.

True

False

56.

Ifacompanyhasareturnonequitythatislowerthanitscostofequitycapital,itcouldbesaidtobedestroyingvalue.

True

False

57.

Althoughgrowthisoftentoutedasoneofthekeydriversofthevalueofastock,noamountofgrowthwillincreasethevalueofacompanyifitsreturntoprovidersofcapitalislessthanthecostofthatcapital.

True

False

58.

Twocompaniesoperateinthesameindustry,butonehasamuchhigherPEratiothantheother.OnereasonforthedifferenceinPEratiocouldbethequalityofearnings.

True

False

59.

Thenumberofoutstandingsharesofacompanywillaffectitsprice-to-earningsratio.

True

False

60.

Thenumberofauthorizedsharesofacompanywillaffectitsearningspershareratio.

True

False

61.

Ifacompanyhasaprice-to-bookratiothatislessthanone,thisimpliesthatfutureexpectedreturnonequityislessthanrequiredreturnonequity.

True

False

62.

Ifacompanyhasalowprice-to-bookratioandahighprice-to-earningsratio,thisisanindicatorthatthestockismostlikelyunderpriced.

True

False

63.

TheSEChasissued"safeharbor"rulestoencourageforecastsbyregistrants,butithashadlimitedsuccess.

True

False

64.

Extrapolationisoneofthemostreliableanalyticaltoolsinforecastingearnings.

True

False

EssayQuestions

65.

EquityValuation

DominikCorporationisafastgrowingcompany.Theywerethefirsttothemarketwithstate-of-the-artvoiceidentificationsoftware.Earningspersharefor2005were$2.08,andbookvaluepershareatthebeginningof2005was$9.55.Dominikdoesnotpaydividendsnorisitexpectedtodosointheforeseeablefuture.Dominik'scostofequityis12%.

Analystspredictthatearningsfor2006and2007willbe$3.22and$3.90,respectively,andthatearningswillgrowat19%peryearforthefollowingthreeyears(2008-2010).Thestockiscurrentlytradingat$35pershare,andanalystshavesetatargetpriceof$50bytheendof2006.

Assumingthattheanalysts'earningsforecastsforthenextfiveyearsarecorrect,andassumingthataftertheendofthenextfiveyearsthecompetitionwillhavedrivenDominik'sabnormalreturnsdowntozero,whatwouldyourtargetpricebefortheendof2006?Whatwilltheprice-to-bookandprice-to-earningsratiosbeattheendof2006?

66.

AccountingBasedValuation

YouaregiventhefollowinginformationforYoungCompany.Asofyear1,thecompany'sbookvalueis$80,000anditscostofcapitalis15%.

Dividendsforyear6andbeyondareexpectedtoremainatyear5level.

a.CalculateYoung'sabnormalearningsforeachoftheyears1to5.

b.UseanaccountingbasedvaluationmodeltoestimatethevalueofYoung'sequityonJanuary1stofyear2,year3,year4andyear5.

c.UsethePBratioformulatodeterminethePBratioforyear2,year3,andyear4.

d.UsethePEratioformulatodeterminethePEratioonJanuary1stofyear3,year4,andyear5.

67.

AnalyzingEarnings

Earningsareextremelyimportanttoapubliclytradedcompanyandthecreditorsandinvestorsofthatcompany.However,lookingatearningswithoutregardtothequalityofthoseearningsishazardoustothehealthofcreditorsandinvestors.

a.Whyisthedeterminationofearningsqualityandpersistenceimportant?

b.Explainrecastingoftheincomestatement,andgivethreeexamplesofitemsthatarerecasted.

c.Explainadjustingoftheincomestatement,andgivethreeexamplesofitemsthatarerecasted.

68.

EarningsPersistence

a.Whatismeantby"earningspersistence"?

b.Whymightananalystbeinterestedinexaminingtheearningspersistenceofacompany?

c.Howmightmanagerialincentivesaffecttheanalysisofearningspersistence?

69.

EarningsManagement

Managementofearningshasbeenanewsworthysubject,aboveandbeyondthebusinesspress.Analystsareforcedtodevotetimeandattentiontoferretingouttherealnumbers,whenthecluesareavailable.Explainfourkindsofearningsmanagement,givingexamples.

70.

AdjustingFinancialStatements

YouareexaminingthefinancialstatementsofABCCorporationforYear2.ABCCorporationmanufactureswidgetsandhasaunionizedworkforce.Youaretryingtoassesstheearningspersistenceofthecompany.Toaidyouinthisendeavor,youareadjustingearningsfornonrecurringandnon-sustainableitems.

Belowisalistofitemsyoubelievemightaffectearningspersistence.Indicatewhytheitemmayaffectearningspersistence,andhoweachitemmightaffectnetincome?

Thefollowinginformationisgivenforthecompany:

1.LIFOliquidationof$3million.

2.Companyhasdecreaseddiscountratetodeterminepost-retirementhealthbenefits.

3.Accumulateddepreciationasapercentageofgrossdepreciableassetsisninetypercent.

4.Laborunionswentonstrikeforonemonthduringtheyear.

71.

EarningsPersistence/FutureEarnings

Considereachofthescenariosbelowindependently.

1.LuxuryLimosisinthebusinessofrentinglimousinesinNewYorkCity.Ithasafleetof200limos.Itownsthelimousinesthatitrents,andkeepsthemonaverageforfiveyears.InYear3,LuxuryLimosshowedalossonthesaleoflimosof$5,000.InYears1and2,itrecordedalossonsaleof$2,000and$1,000,respectively.Shouldthegainsandlossesonthesaleoflimosbeignoredwhendeterminingearningspersistenceornot?

2.TurnaroundCorporationhasjusthirednewtopmanagement.Inthenewmanagement'sfirstyear,theytakeahugerestructuringcharge(looksasthoughtheyaretakinga"bigbath").Includedintherestructuringchargeare:

?Recognitionofacontingentliabilityforprobableenvironmentalclean-up

?Write-downofassets(whichamountedtoa50%write-downofallassets)

?Achargeforafutureupgradeofitscomputersystem

Foreachoftheitemsincludedintherestructuringcharge,andconsideringmanagement'spossiblemotivationfortakinga"bigbath",identifyhowtheseitemsmightaffectfuturerecordedincome?

Chapter11EquityAnalysisandValuationAnswerKey

MultipleChoiceQuestions

1.

Whichofthefollowingisnotincludedinthedefinitionofearningspersistence?

A.

Stabilityoftheearnings

B.

Magnitudeoftheearnings

C.

Predictabilityoftheearnings

D.

Theearnings'trend

2.

Whichofthefollowingisnotafactorinproducingearningsforecasts?

A.

Estimatingthelevelofdividends

B.

Separationofrecurringandnonrecurringcomponents

C.

Recognizingpotentialearningsmanagement

D.

Recognizingpotentialincomesmoothing

3.

Whichofthefollowingisnotaformofearningsmanagement?

A.

Changesinaccountingassumptions

B.

Timingrevenuerecognition

C.

Write-downsofoperatingassets

D.

Reportingfictitioustransactions

4.

Pitfallswhenforecastingearningsincludefailuretoconsider:

I.capitaladequacy.

II.capacityconstraints.

III.anticipatedreturnonequity.

IV.newmanagement.

A.

IandIII

B.

IIandIV

C.

I,III,andIV

D.

I,II,andIII

5.

Whichofthefollowingcanaffectearningsquality?

I.Management'schoiceofaccountingprinciple

II.Management'schoiceofdividendpolicy

III.Management'sestimates

IV.Management'sdiscretionaryexpenditures

A.

I,II,III,andIV

B.

I,II,andIII

C.

I,III,andIV

D.

IandIII

6.

Whichofthefollowingstatementsconcerningqualityofearningsiscorrect?

A.

Allotherthingsbeingequal,themorecyclicaltheindustrywithinwhichacompanyoperates,theloweritsqualityofearnings.

B.

Thesmoothertheearningsstreamofacompany,thegreaterthequalityoftheearnings.

C.

Qualityofearningsisindependentofbusinessrisk.

D.

Qualityofearningsislargelybeyondmanagement'scontrol.

7.

Agrowingcompanywithdisappointingprofitabilitywouldgenerallyhave:

A.

highprice-to-bookratioandhighprice-to-earningsratio.

B.

highprice-to-bookratioandlowprice-to-earningsratio.

C.

lowprice-to-bookratioandhighprice-to-earningsratio.

D.

lowprice-to-bookratioandlowprice-to-earningsratio.

8.

Whenassessingearningspersistence,itisimportanttoanalyzediscretionaryexpenditures.Whichofthefollowingiscorrect?

I.Researchanddevelopmentisgenerallyconsideredadiscretionaryexpenditure.

II.Decreaseddiscretionaryexpendituresshouldalwaysbetakenasapositiveindicatorthatthecompanyisgettingcostsundercontrol.

III.Advertisingexpenditurescanbeconsidereddiscretionaryexpenditures,whichoftenhaveimplicationsforfuturesales.

IV.Absolutelevelsofdiscretionaryexpendituresaremoreimportantthanthelevelofexpendituresrelativetosales.

A.

I,II,andIII

B.

I,III,andIV

C.

II,III,andIV

D.

IandIII

9.

Whichofthefollowingshouldbeattemptedinordertogaugethequalityofacompany'searnings?

I.Assessinganadequacyofdiscretionaryexpenditures

II.Assessingdegreeofconservatisminreportingassets

III.Assessingdegreeofconservatisminreportingliabilities

IV.Assessingdegreeofconservatisminapplicationofaccountingprinciples

A.

I,II,III,andIV

B.

I,II,andIV

C.

II,III,andIV

D.

I,III,andIV

10.

Whichofthefollowingfactorsisleastlikelytoaffectearningspersistence?

A.

Changingpricelevels

B.

Extraordinaryitems

C.

Usualoperatingcosts

D.

Accountingmethodsused

11.

Whichofthefollowingisnotatypicalformofearningsmanagement?

A.

Changingaccountingestimates

B.

Offsettingone-timegainsandlosses

C.

Changingaccountingprinciples

D.

Changingauditors

12.

Whenconsideringthedeterminantsoftheprice-to-bookratio(PB)whichofthefollowingiscorrect?

I.Allotherthingsbeingequal,thegreateracompany'sreturnoncommonstockholders'equity,thegreaterthePBratio.

II.Allotherthingsbeingequal,thegreateracompany'scostofequity,thegreaterthePBratio.

III.Ifacompany'sreturnoncommonstockholders'equityequalsitscostofequity,thePBratioshouldequal1.

IV.Thegreateracompany'scurrentearningsthehigherthePBratio.

A.

I,III,andIV

B.

IandIII

C.

IIandIV

D.

IandII

13.

Youareanalyzingastock.Youexpectthatearningswillgrowquicklyrelativetoitscurrentlevel,buttheexpectedreturnoncommonstockholders'equityislow.Assumingpricetobeconstant,whatlevelsoftheprice-to-earningsratio(PE)andtheprice-to-bookratio(PB)wouldyouexpecttosee?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

14.

FristyCorporationhasabookvalueofequityof$5,000atthebeginningof2005,andnetincomeof$1,000foryearended2005.Itpaysnodividends,anditscostofequitycapitalis10%.Itexpectsreturnonbeginningofyearequitytoremainconstantfor2006and2007anddecreaseto10%thereafter.Whatshoulditsprice-to-bookratiobeattheendof2005(pickclosestnumber)?

A.

1.01

B.

1.05

C.

1.09

D.

1.19

15.

ABCCorporationandDEFCorporationoperateinthesameindustry.ABChasaPEratiothatis50%higherthanDEFCorporation.WhichofthefollowingaccountsforsomeofthedifferenceintheobservedPEratios?

I.ABCusesmoreconserva