If the market expects a firm to generate net income each period exactly equal to
ID: 2524581 • Letter: I
Question
If the market expects a firm to generate net income each period exactly equal to required earnings (ROCE = RE), then the value-to-book ratio of the firm will be
a. a multiple of the book value of common shareholders' equity.
b. exactly equal to one.
c. less than the price-earnings ratio of the firm.
d. greater than the price-earnings ratio of the firm.
A firm that is increasing its capital structure leverage and increasing profitability will likely experience a (an)
a. increasing value-to-book ratio
b. decreasing return on assets
c. volatile price-earnings ratio
d. None of these answer choices are correct.
Price-earnings valuation multiples make the following strong assumptions:
a. Earnings are persistent, not transitory.
b. Current period earnings will be constant in the future.
c. The cost of equity capital will remain constant in the future.
d. All of these answer choices are correct.
A firm's price-earnings ratio will
a. increase sharply when a firm recognizes a temporary decrease in earnings per share.
b. decrease sharply when a firm recognizes a temporary increase in earnings per share.
c. Either an increase or a decrease can happen.
d. Neither an increase nor a decrease can happe
Explanation / Answer
Q1. b: Exactly equal to one
Q2. a: Increasing value to book ratio
Q3. d: All of these answer choices are correct
Q4. c: Either an increase or decrease can happen