Which Method of Determining a Firm's Net Worth Divides the Market

question 108

Multiple Choice

Which method of determining a firm's net worth divides the market price of the firm's stock by the annual earnings per share, and multiplies this number by the firm's average net income for the past five years?

• A) Debt/equity method
• B) Current ratio method
• C) Price-earnings ratio method
• D) Long-term asset method
• E) Outstanding shares method

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Definitions:

Acquisition Method

An accounting approach used to consolidate the financial statements of two companies when one company acquires control over the other.

Purchase Method

An accounting method used in mergers and acquisitions where the assets and liabilities of the acquired company are added to the acquirer's balance sheet at their fair market values.

Business Combination

A transaction or event in which an acquirer obtains control of one or more businesses, often involving mergers, acquisitions, or consolidations.

Pooling-of-interests Method

A merger accounting method in which the assets and liabilities of merging companies are combined using book values, rather than the purchase method.