Please state whether you agree or disagree with the following statements. 1. Uni
ID: 2747253 • Letter: P
Question
Please state whether you agree or disagree with the following statements.
1. Uniform accounting standards around the world would eliminate all distortions from accounting statements and lead to uniform numbers across all companies.
2. Company A’s return on equity (ROE) was 20% and Company B’s ROE was 15%. Therefore Company A outperformed Company B and is a better investment than Company B
3. There would be no difference in the credit extended to a UK car manufacturer or a French car manufacturer since they are of comparable size, exposed to similar business risks and have many tangible assets to offer as collateral.
4. A high market to book ratio relative to industry will it outperform or underperform?
5. Need to raise $20 million for a new project. You forecast that earnings per share (EPS) next year will be $1.45 if the firm issues new equity, but $1.55 if the firm issues new debt. Therefore debt is a better source of financing.
6. Company A ships product evenly thoruhgout quarter, B- all in the last two weeks-. Each company pay 30 days after receiving shipment. Financial statements at the end of the quarter would be identical as they both recognize revenue at shipment?
7. Bond rating communicates useful information to capital markets about a firm’s creditworthiness and as it is constructed by using financial ratios it is an objective measure of credit risk
8. Debt ratings communicate useful information to capital markets about a firm’s credit quality and should be constructed solely by using financial ratios and past numbers which are verifiable.
9. Equity investors receive dividends as payoffs for investing in equity shares. The value of the equity shares should therefore be calculated by discounting expected future dividends.
10. Altman Z-score- useful to capital markets about firm’s probability of distress as it is constructed using financial ratios- objective measure of financial distress
11. Strategy analysis is an unnecessary detour in doing financial statement analysis. It’s better to get straight to the accounting issues.
12. Companies include share options as part of their executive compensation plans solely to align the interests of the management team to those of shareholders
13. Boston Electronics earned £5 per share. Analysts forecast that EPS will grow 6% annually. Chambers Group earned £5 per share, but analysts forecast that it will only grow 2% annually. If capital markets are efficient, Boston Electronics should have a higher stock price than Chambers Group.
14. Investing in a portfolio of bonds rated BBB or below- you would demand a higher yield
Explanation / Answer
1-agree, uniform accounting code will make the financials comparable with out any changes around the world.
2-disagree, if the compay is highly levered the ROE can be misleading
3-disagree, the country risk will also matter
4-underperform
5-debt looks as better source of finacing but company would face leverage impliactions in distress if highly levered hence right mix of debt to equity is a way to go.
6-disagree the firm with even shipment will recognise revenues earlier
7-True
8-Slightly disagree, not solely depend on financial ratios but performance in industry and past default database in industry will also impact
9-Agree
10-Agree
11-for FSA projections strategy needs to be followed else for past performace may not be required.
12-Agree
13-Disagree
14-yes, higher the risk higher is the desired return