978-1118873731 Word Chapter 05 Solutions

subject Type Homework Help
subject Pages 2
subject Words 1026
subject Authors David Wessels, Marc Goedhart, McKinsey & Company Inc. Tim Koller

Unlock document.

This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
page-pf1
4
Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 5 The Stock Market is Smarter than You Think
Solutions
1. Assuming a constant growth rate in earnings and a constant return on capital, the returns to
shareholders are composed of a cash yield plus the growth rate in earnings. If the P/E gravitates
2. Companies attempt to manage earnings by timing the recognition of revenues and costs or by
using gimmicks such as selling assets or introducing customer incentives. Researchers have
3. Although investors place more importance on a company’s economic fundamentals than on
reported earnings, sometimes short-term earnings are the only data investors have on which to
4. Investors care about goodwill impairment only if the adjustment reflects lower-than-expected
benefits from the acquisition that have not already been reflected in the stock price. When an
5. Changing from first-in first-out (FIFO) to last-in first-out (LIFO) inventory reduces profits during
6. The potential benefits from cross-listing are an increase in analyst coverage, a broader
shareholder base, improved liquidity, improved corporate governance, and better access to
7. The wider swings in price for a stock such as HighTechCo when compared with BrandCo can be
explained as a rational reaction to fundamentals. HighTechCo is a newer company in a more
8. It is riskier to take a short position in an overpriced stock because of the extra costs and the
possibility of even more irrationality (i.e., noise trading). The extra costs include borrowing the
securities, paying interest, and posting margin. Noise trading can increase the price of the
page-pf2
5
9. Noise traders deserve attention from managers because their activity partly determines the size
10. The market for a stock is most efficient if there are both traders and fundamental investors. If
there were only fundamental investors, the stock would not be as liquid because the investors
11. Noise traders move in and out of shares quickly and cause short-term movements. Since they
both buy and sell a great deal, their volume of trading is high, but the long-term effect is low. In
12. Growth stocks are those where the earnings are expected to grow and to increase the stock
price with the growth. Value stocks do not necessarily have expectations of earnings growth.
13. Managers think that issuing guidance on their likely EPS in the next quarter is necessary because
it leads to higher valuations, lower share price volatility, and improved liquidity. Studies have
14. Firms that chose to expense employee stock options even before being required to do so would

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.