Choose correct answers!

1.Using the value-to-book version of the residual income valuation approach, the value-to-book ratio is determined as

a. one plus the present value of future comprehensive income divided by book value of common equity

b. book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.

c. one plus the present value of future residual ROCE.

d. market value of common equity plus the present value of expected future residual income.

2.A firm's value-to-book ratio might be greater than 1.0 due to fundamental reasons. An example of a fundamental reason that would cause the value-to-book ratio to increase is

a. creating growth in profitable operations that generate ROCE that exceeds RE.

b. growth in shareholders' equity by issuing stock.

c. being profitable.

d. increasing risk

3.A firm's market-to-book ratio might be greater than 1.0 due to accounting reasons. An example of an accounting reason that would cause the market-to-book ratio to increase is

a. level 1 fair values.

b. straight-line methods of depreciation.

c. using LIFO versus FIFO for inventory.

d. off-balance-sheet assets arising from investments in successful research and development programs that are expensed according to conservative accounting principles.

4.When a firm has a value-to-book ratio that is greater than 1, it implies

a. the firm's shares are underpriced.

b. the firm must be very profitable.

c. the firm's shares are overpriced.

d. the firm's shares may be overpriced, underpriced, or correctly priced, depending on how the value-to-book ratio compares to the market-to-book ratio.

5.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. less than the price-earnings ratio of the firm.

b. a multiple of the book value of common shareholders' equity.

c. greater than the price-earnings ratio of the firm.

d. exactly equal to one.