5.

0 Points
According to the discounted free cash flow valuation model, the market value of common
shares depends upon investors':
Question 1 of 20

A. current expectations about the prospects of current free cash flows.

B. current expectations about the prospects of future free cash flows.
C. future expectations about the prospects of current free cash flows.
D. future expectations about the prospects of future free cash flows.
.
5.0 Points
Recent research indicates that stock returns correlate better with:
Question 2 of 20

A. accrual earnings than realized operating cash flows.

B. cash basis earnings than realized operating cash flows.
C. future operating cash flows than accrual earnings.
D. realized operating cash flows than accrual earnings.
.
.
If firm ABC currently earns $12.00 per share, and has a risk-adjusted cost of equity capital of
12.5%, a share of common stock should theoretically sell for:

A. $1.50.
B. $12.00.
C. $40.00.
D. $96.00.

Income from continuing operations, excluding special or nonrecurring items, is regarded as:

A. expenses.
B. permanent earnings.
C. transitory earnings.
D. value-irrelevant earnings.
Income or loss from discontinued operations is regarded as:

A. expenses.
B. permanent earnings.
C. transitory earnings.
D. value-irrelevant earnings.
Extraordinary gains or losses, such as from early extinguishment of debt, are regarded as:

A. expenses.
B. permanent earnings.
C. transitory earnings.
D. value-irrelevant earnings.
A cumulative effect adjustment to income due to a change in accounting principle is regarded
as:

A. permanent earnings.
B. sustainable earnings.

C. transitory earnings.
D. value-irrelevant earnings.

Service revenue in conjunction with the sale of merchandise is an example of:

A. sustainable earnings.
B. transitory earnings.
C. unsustainable earnings.
D. value-irrelevant earnings.

The assessment of earnings quality is best accomplished through the use of the:

A. balance sheet and cash flow statement.

B. multi-step income statement, balance sheet, and cash flow statement.
C. single-step financial statements.
D. single-step income statement, balance sheet, and cash flow statement.

According to the abnormal earnings approach of equity valuation, investors willingly pay a
premium for those firms that:

A. earn an amount equal to the equity cost of capital.

B. earn less than the cost of equity capital.

C. produce negative abnormal earnings.

D. produce positive abnormal earnings.

Earnings in excess of stockholders' required dollar return on invested capital are:

A. abnormal earnings.
B. sustainable earnings.
C. transitory earnings.
D. value-irrelevant earnings.

A bond that is considered unsecured is referred to as a:

A. callable bond.
B. debenture bond.
C. senior bond.
D. sinking fund bond.

A source of conflict that may arise between creditors and owners is:

A. low risk investment projects.

B. management's usage of repayment funds.

C. reduction in dividends by the corporation.

D. timely repayment of debt.

Which one of the following is an example of a negative covenant?

A. Compliance with laws

B. Maintenance of insurance
C. Restrictions on mergers
D. Rights of inspection

According to the SEC, any breach of a loan covenant that existed at the balance sheet date that
has not been subsequently cured should:

A. be disclosed in the audit report.

B. be disclosed in the notes to the financial statements.
C. be recorded as an adjustment to the financial statements.
D. not be disclosed.

When a debt covenant is violated, the related debt must be classified as current if it is:

A. likely that the borrower will not be able to cure the default in the next twelve months.
B. possible that the borrower will not be able to cure the default in the next twelve months.

C. probable that the borrower will not be able to cure the default in the next twelve months.
D. reasonably likely that the borrower will not be able to cure the default in the next twelve
months.

Earnings increases arising from management efforts to avoid violation of debt covenants are
likely to be:

A. permanent.
B. sustainable.
C. translated into permanent cash flows.
D. unsustainable.

The most frequently used long-term incentive device in executive compensation packages is:

A. cash bonuses.
B. new cars.
C. phantom stock.
D. stock options.

The widespread use of accounting-based incentives for executive compensation is controversial

for which one of the following reasons?

A. Accounting based incentive plans can encourage managers to adopt a long-term business

focus.
B. Earnings growth does not automatically increase shareholder value.
C. Executives cannot use their discretion over the accounting policies.
D. Managers do not have accounting flexibility.

Regulatory Accounting Principles (RAP) are important to those outside the regulatory agencies
because:

A. GAAP does not allow reporting for assets and liabilities consistent with the way in which
regulators establish rates.
B. GAAP may allow reporting for assets and liabilities consistent with the way in which
regulators establish rates.
C. Regulatory Accounting Principles are not compatible with GAAP.
D. they are required by the SEC.