Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 14, Problem 19CQ
Summary Introduction
To discuss: The
Introduction:
Market Efficiency refers to the market strategy where the stock price reflects to the current available information. The stock price goes up and down according to the relevant available information.
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CK Hitman Limited has changed how it accounts for inventory from FIFO to weighted average. Although the resulting earnings report released is 23 percent higher than before the change in accounting policy, no effect on tax payable. There is no other surprise in the earnings report, and the change in the policy was publicly announced. Assume that the market is efficient.
Required:
Evaluate how the movement of stock price when the market learns that the reported earnings are higher.
What if the change in policy can make the firm pay less tax in future.
Bob's Inc has the following balance sheet and income statement data
see image...
The new CFO thinks that inventory are excessive and could be lowered to cause the current ratio to equal industry average 3.00 w/o affecting either sales or net income. assuming that inventories are sold off and not replaced to get the current ratio to the target level and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?
Which of the following statement is correct?
O Inventory Turnover Ratio is a measure of how much the market is willing to pay (per share) for one
dollar's worth of the firm's recorded earnings per share, and it is measure of the market's perception
as to the future earnings potential of the firm.
All the answers are incorrect.
The times interest earned ratio is equal to Earnings Before Taxes (EBT) divided by Debt, and it is
often used to assess a company's ability to service the interest on its debt with operating income
from the current period.
Asset activity ratios measure the ability of a firm to meet its short-term obligations.
O When the investors have more confidence about the firm's future growth, then the higher P/E ratio
is expected.
Chapter 14 Solutions
Corporate Finance
Ch. 14 - Prob. 1CQCh. 14 - Prob. 2CQCh. 14 - Efficient Market Hypothesis Which of the following...Ch. 14 - Market Efficiency Implications Explain why a...Ch. 14 - Efficient Market Hypothesis A stock market analyst...Ch. 14 - Semistrong Efficiency If a market is semistrong...Ch. 14 - Efficient Market Hypothesis What are the...Ch. 14 - Prob. 8CQCh. 14 - Prob. 9CQCh. 14 - Efficient Market Hypothesis For each of the...
Ch. 14 - Technical Analysis What would a technical analyst...Ch. 14 - Prob. 12CQCh. 14 - Prob. 13CQCh. 14 - Efficient Markets A hundred years ago or so,...Ch. 14 - Efficient Market Hypothesis Aerotech, an aerospace...Ch. 14 - Prob. 16CQCh. 14 - Prob. 17CQCh. 14 - Efficient Market Hypothesis Newtech Corp. is going...Ch. 14 - Prob. 19CQCh. 14 - Efficient Market Hypothesis The Durkin Investing...Ch. 14 - Efficient Market Hypothesis Your broker commented...Ch. 14 - Efficient Market Hypothesis A famous economist...Ch. 14 - Efficient Market Hypothesis Suppose the market is...Ch. 14 - Prob. 24CQCh. 14 - Prob. 25CQCh. 14 - Efficient Market Hypothesis Assume that markets...Ch. 14 - Prob. 27CQCh. 14 - Evidence on Market Efficiency Some people argue...Ch. 14 - Prob. 1QAPCh. 14 - Prob. 2QAPCh. 14 - Prob. 3QAPCh. 14 - Prob. 4QAPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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- FAMA is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate FAMA pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The times interest earned ratio will decrease. b. The ROA will decline. c. Taxable income will decrease. d. The tax bill will increase. e. Net income will decrease. Please explain answer.arrow_forwardCompanies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings? 2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings? 3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?arrow_forwardCompanies often are under pressure to meet or beat Wall Street earnings projections in order to increase stockprices and also to increase the value of stock options. Some resort to earnings management practices to artificiallycreate desired results.Required:Is earnings management always intended to produce higher income? Explain.Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earnings.Required:1. What is meant by the term non-GAAP earnings in this context?arrow_forward
- Which ONE of the following statements is FALSE? O Firms report peripheral gains and losses on a pretax basis. If you eliminate a gain or loss, you should also eliminate the related tax effect from income tax expense. O Announcements of restructurings are typically associated with stock price increases. Restructurings are expected to yield operating efficiencies or strategic benefits and, thus, will result in higher future expenses and lower future revenues. O Firms revalue certain assets and liabilities each period even though firms have not yet realized the value change in a market transaction. The related unrealized gains and losses are reported as comprehensive income.arrow_forwardWhich of the following decreases the cash holding A.The rising commodity prices increases the value of law material inventoriesby 10% B.A manufacturer decreases production in anticipation of a decrease in demand C.THe frim repurchases its own stocks D.THe corporation has decided to give their customer less time in paying their purchasesarrow_forwardSoved Which of the following statements are true? Multiple Cholce none of the statements are true The higher the number of days' sales In recelvables, the better A low Inventory turnover can result In stock outs. A dlvision's residual Income Is Irrelevant to profitablityarrow_forward
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