Reading 58: Overview of Equity Securities-LOS i 习题精选 equity

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Session 14: Equity Analysis and Valuation
Reading 58: Overview of Equity Securities

LOS i: Compare and contrast a company's cost of equity, its (accounting) return on equity, and investors' required rates of return.

 

 

When analyzing an industry characterized by increasing book values of equity, return on equity for a period is most appropriately calculated based on:

A) beginning book value.

B) average book value.

C) ending book value.

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When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

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A firm’s cost of equity capital is least accurately described as the:

A) minimum rate of return investors require to invest in the firm’s equity securities.

B) expected total return on the firm’s equity shares in equilibrium.

C) ratio of the firm’s net income to its average book value.

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The ratio of the firm’s net income to its average book value is the firm’s return on equity, which can be greater than, equal to, or less than the firm’s cost of equity. Cost of equity for a firm can be defined as the expected equilibrium total return in the market on its equity shares, or as minimum rate of return that investors require as compensation for the risk of the firm’s equity securities.