Reading 37: Equity: Concepts and Techniques- LOS f～ Q1-4

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LOS f: Analyze the effects of inflation on asset valuation.

Q1. Thomas Riolo is considering adding either Multifactory Ltd. or Analogesous Corp. to his equity portfolio. He has concluded that Multifactory is likely to have a higher valuation than Analogesous because of two factors:

Factor #1: Multifactory has a higher franchise factor than Analogesous.

Factor #2: Multifactory has a lower inflation pass-through than Analogesous.

Riolo is correct with respect to:

A) factor #1 only.

B) factor #2 only.

C) both factors.

Q2. Firm 1 and Firm 2 are both based in countries with a 3% rate of inflation. The real rate of return required by investors from both companies is 4%. Firm 1 can pass on 70% of inflation through its earnings and Firm 2 can pass on 90%. Based on the above information, which of the following statements is most accurate? Firm 1's estimated price-to-earnings (P/E) ratio is:

A) higher than Firm 2’s.

B) 16.39.

C) 20.41.

Q3. Which of the following statements about inflation and share value is TRUE? All other things being equal:

A) the higher the inflation flow-through rate, the lower the value of the firm.

B) the higher the inflation flow-through rate, the higher the value of the firm.

C) in a situation of less than 100% inflation pass-through, a higher inflation rate will results in a higher value of the firm.

Q4. Assume a simple service firm earns only service revenue and incurs depreciation as its most significant expense. In the current year, there is 3 percent inflation. However, due to government regulations, the firm is unable to pass on any of the inflation to its customers. In real terms, the firm’s net income is:

A) correctly stated.

B) overstated.

C) understated.

[此贴子已经被作者于2009-3-6 13:54:07编辑过]