solution

If an analyst estimates a quality of earnings ratio of 0.8, what does this imply about the company?

The company’s cash flows are likely unsustainable in the long run

The company is likely overvalued due to aggressive accounting policies

The company may be aggressive in its revenue recognition policy

2) What aspect of a firm is measured by the Beneish M-score?

Financial reporting quality

Quality of earnings

Bankruptcy risk

3) Which of the following is not a potential measurement error that arises from GAAP?

Uncollectable/doubtful accounts are difficult to estimate

Assets are typically undervalued due to depreciation and amortization rules

Research and development is expensed rather than capitalized

4) When clean surplus accounting is violated, it is often the case that net income is understated but book equity is accurately measured. In that situation, what is the effect on ROE?

ROE will be unaffected

Measured ROE will be lower than it should be

Estimated ROE will be higher than it should be

5) What aspect of a firm is measured by Altman’s Z-score?

Financial reporting quality

Bankruptcy risk

Liquidity

6) What are the only two inputs that matter to valuation according to the pure dividend discount model?

Earnings and the cost of equity

WACC and growth

Growth and risk

7) How does the H-model differ from the Gordon dividend discount model?

It is a two-stage model with a sharp decline from high to low growth periods

It measures earnings growth rather than future dividends

It utilizes multi-stage growth with a linear decline over several years

8) Which of the following is not one of Porter’s Five Forces?

Cost leadership in the industry

Power of suppliers

Threat of substitutes

9) Which of the following is not considered when computing the cash conversion cycle?

Capital intensity ratio

Inventory turnover

Receivables turnover

10) If a firm has forecasted earnings of $1.50, expected growth of 3%, cost of equity of 8%, WACC of 7%, and a P/E ratio of 14, what is your estimate of present value using the relative P/E method? (Note: Not all numbers are necessary for this calculation)

$30.90

$21.00

$38.63