Question 1

Which is most accurate concerning the behavior of a stock's return after a stock split relative to companies whose stock has not split?

Accepted Answer

The stock split builds in positive expectations for the stock price; therefore, improvements in performance of a company whose stock has recently split have little or no impact on the behavior of the stock.

Question 2

Managers should assess whether their company's share price has deviated more than 5 percent from its fundamental value on a weekly basis and,if it has,take appropriate action such as issuing or buying back shares.

Accepted Answer

Managers should look to the long-term behavior of a company’s share price, not whether it is 5 or 10 percent undervalued this week.

Question 3

With respect to the cash flow volatility and earnings volatility of a certain firm,which of the following is most accurate concerning their effects on ratios of market value to capital?

Accepted Answer

It is not certain that earnings volatility will affect the value of a firm, but cash flow volatility is very likely to have an effect.

Question 4

Which of the following are valid reasons that a firm's stock split can be followed by an increase in the value of the shares of that firm?
I.Signaling.
II.Liquidity.
III.More shares outstanding.
IV.Self-selection.

Accepted Answer

Signaling and self-selection are both valid reasons why a stock split may lead to an increase in a firm's share value. By splitting their stock, the firm may be signaling to the market that they are confident in their future prospects, which can increase investor confidence and demand for the stock. Additionally, self-selection may occur as the firm is more likely to split their stock if they believe the market will value their shares higher in the future. Liquidity and more shares outstanding are not necessarily factors that would lead to an increase in share value.

Question 5

Which of the following are valid reasons that cross-listing might actually improve a company's stock performance?
I.Improved corporate governance.
II.Trading in multiple time zones.
III.Access to an increased number of investors.
IV.Affirmation effect of being listed in more than one developed market.

Accepted Answer

Improved corporate governance and access to an increased number of investors are valid reasons for improved stock performance due to cross-listing. Improved governance can lead to better management practices, and more investors can increase demand for the stock.

Question 6

Empirical evidence shows that managers can effectively manage share price by focusing on EPS and meeting analysts' estimated earnings.

Accepted Answer

While managers can influence short-term share prices by focusing on EPS and meeting analysts' estimates, over the long term, share prices are more significantly affected by the company's fundamental financial health, market conditions, and broader economic factors. Focusing solely on EPS and analysts' estimates can lead to neglect of underlying business performance and sustainability.

Question 7

Voluntary option expensing has been found to have which of the following effects?

Accepted Answer

Studies have found that voluntary option expensing does not have a significant impact on share price. Option expensing is already factored into the market's expectation of a company's future earnings, so voluntarily expensing options does not provide new information that would affect share price. The use of LIFO or FIFO accounting does not have any relevance to the impact of voluntary option expensing on share price.

Question 8

Which of the following are ways the managers of firms may try to meet earnings forecasts and have been proven to have an impact on share price?
I.Deferring divestments.
II.Gradually providing new information to lead analysts.
III.Offering customer incentives without immediate costs.
IV.Accounting adjustments such as capitalizing costs and R&D.

Accepted Answer

Investors tend to see through accounting adjustments and attempts to avoid surprises. Investors do recognize that customer incentives without immediate costs to the firm will lead to costs in the future, and the price will react negatively.

Question 9

An analysis of 50 European companies that began reporting using U.S.GAAP over the period 1997 to 2004 found which of the following?
I.Earnings under GAAP were generally lower than earnings under the home country's rules.
II.The differences in earnings under the two regimes were all less than 10 percent.
III.The stocks of the 50 companies generally reacted positively when the disclosures were made.
IV.Executives had concerns over the impact of reporting under U.S.GAAP.

Accepted Answer

I, III, and IV are correct. Earnings under GAAP were often found to be lower than under home country rules, indicating a conservative approach by GAAP. The stocks of companies generally reacted positively, suggesting investor confidence in the transparency and comparability provided by GAAP. Executives often had concerns over the complexity and potential impact of adopting U.S. GAAP, reflecting apprehensions about the transition and its implications. Statement II is incorrect because the differences in earnings could vary widely, not necessarily being less than 10 percent.

Question 10

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.

Accepted Answer

Goodwill impairment is a measure of whether the value of the goodwill associated with an acquisition has decreased. Investors are more likely to care about this if it suggests that the benefits of the acquisition were overestimated, and if this has not already been priced into the value of the stock.

Question 11

Empirical research shows that goodwill impairments have no impact on a company's share price at the time of the impairment.

Accepted Answer

Empirical research has shown that goodwill impairments do not have a significant impact on a company's share price at the time of the impairment. This is because goodwill is an intangible asset that does not represent any realizable value, and therefore its impairment does not affect the company's underlying financial performance.

Question 12

Academic research has found that share prices of companies that are removed from a major stock index:

Accepted Answer

Academic research has found that share prices of companies that are removed from a major stock index usually drop immediately, but the decline is usually reversed within one or two months. The drop is attributed to index funds that sell the stock upon deletion from the index. However, active investors may see this as an opportunity to buy undervalued securities, causing the reversal of the decline.

Question 13

Managers should focus on issuing guidance on their likely EPS in the next quarter because it leads to higher valuations,lower share price volatility,and improved liquidity.

Accepted Answer

Studies have found no evidence that issuing EPS guidance accomplishes these goals. Managers might better accomplish these goals by providing investors with a broad set of operational measures such as volume targets, revenue targets, and initiatives to reduce costs.

Quiz 5: The Stock Market Is Smarter Than You Think