QUESTION 12 You have been provided the following actual financial information from the reformulated financial statements of Quesnel Ltd. for the year 2020, and then a set of forecasted financial information for the three-year period, 2021 - 2023. 2020 A $500,000 9% 1.126 $80,000 2021 E $525,000 9% Sales Operating Profit Margin (after tax) Financial Leverage Net Financial Obligations (NFO) 2022 E $540,000 9% 1.077 $87,500 2023 E $550.000 9% 1.064 $90,000 1.111 $85,000 In conjunction, you have also been provided with the following additional information: the forecasted growth rate in comprehensive income after tax (CI) after 2023 is 4% Quesnel's cost of equity capital is 8% Quesnel's net borrowing cost (NBC) after tax is 4% Quesnel has no Other Comprehensive Income (OCI) items to report during any years Quesnel has 100,000 common shares outstanding Using the Abnormal Earnings (Residual Income) valuation model, what is the intrinsic value of a common share of Quesnel Ltd. based on the forecasts and additional information presented above? O 1.$5.78 2. $10.55 3.$12.12 4.59.84 QUESTION 13 The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, A Ltd. and B Inc., are presented below. The two companies are direct competitors in the same industry sector, produce the same product and sell it to the same set of customers. They have the same scale of operation and the same capital structure. The average values of the market-to-book (M/B) and forward price-earnings (P/E) ratios for the industry sector are also presented below. A Ltd. Price-Earnings (P/E) ratio Market-to-Book (M/B) ratio 4.50 0.50 B Inc. 4.50 0.75 Industry Mean 5.00 3.90 Based on this information, which of the following statements can NOT be TRUE? 1.B Inc. has experienced a greater growth in its book value than has A Ltd. because it has a higher market-to-book (M/B) ratio 2. Both firms use the same accounting methods 3. Both firms have positive abnormal earnings (residual income) because both have a market-to-book (M/B) ratio exceeding a value of zero 4. The forecasted earnings for next year is the same for both firms because they have the same forward price-earnings (P/E) ratio QUESTION 14 Which of the following changes will NOT result in an increase in the magnitude of a firm's trailing price-earnings (P/E) ratio? 1. The firm's decision to adopt a more conservative accounting policy 2. An increase in the anticipated growth rate for the firm's future earnings 3. An decrease in the firm's earnings as the result of an unusual loss 4. An increase in the firm's financial leverage (FLEV) QUESTION 12 You have been provided the following actual financial information from the reformulated financial statements of Quesnel Ltd. for the year 2020, and then a set of forecasted financial information for the three-year period, 2021 - 2023. 2020 A $500,000 9% 1.126 $80,000 2021 E $525,000 9% Sales Operating Profit Margin (after tax) Financial Leverage Net Financial Obligations (NFO) 2022 E $540,000 9% 1.077 $87,500 2023 E $550.000 9% 1.064 $90,000 1.111 $85,000 In conjunction, you have also been provided with the following additional information: the forecasted growth rate in comprehensive income after tax (CI) after 2023 is 4% Quesnel's cost of equity capital is 8% Quesnel's net borrowing cost (NBC) after tax is 4% Quesnel has no Other Comprehensive Income (OCI) items to report during any years Quesnel has 100,000 common shares outstanding Using the Abnormal Earnings (Residual Income) valuation model, what is the intrinsic value of a common share of Quesnel Ltd. based on the forecasts and additional information presented above? O 1.$5.78 2. $10.55 3.$12.12 4.59.84 QUESTION 13 The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, A Ltd. and B Inc., are presented below. The two companies are direct competitors in the same industry sector, produce the same product and sell it to the same set of customers. They have the same scale of operation and the same capital structure. The average values of the market-to-book (M/B) and forward price-earnings (P/E) ratios for the industry sector are also presented below. A Ltd. Price-Earnings (P/E) ratio Market-to-Book (M/B) ratio 4.50 0.50 B Inc. 4.50 0.75 Industry Mean 5.00 3.90 Based on this information, which of the following statements can NOT be TRUE? 1.B Inc. has experienced a greater growth in its book value than has A Ltd. because it has a higher market-to-book (M/B) ratio 2. Both firms use the same accounting methods 3. Both firms have positive abnormal earnings (residual income) because both have a market-to-book (M/B) ratio exceeding a value of zero 4. The forecasted earnings for next year is the same for both firms because they have the same forward price-earnings (P/E) ratio QUESTION 14 Which of the following changes will NOT result in an increase in the magnitude of a firm's trailing price-earnings (P/E) ratio? 1. The firm's decision to adopt a more conservative accounting policy 2. An increase in the anticipated growth rate for the firm's future earnings 3. An decrease in the firm's earnings as the result of an unusual loss 4. An increase in the firm's financial leverage (FLEV)
