Which of the Following Statements Is Most Correct

question 25

Multiple Choice

Which of the following statements is most correct?

• A)Current cash flows are usually better proxies for future cash flows than a firm's earnings are, so the Price/Cash Flow ratio is typically a more reliable predictor of price than the
• Price/Earnings ratio.
• B)Current cash flows are typically reliable predictors of future earnings, so the P/E ratio is often calculated using cash flows rather than earnings.
• C)Current earnings and current cash flows are generally close enough in amount that the Price/Cash Flow ratio and the Price/Earnings ratio will be very similar.
• D)Current earnings are often better representatives of future cash flows than are current cash flows, so the Price/Earnings ratio is often a better predictor of price than the Price/Cash
• Flow ratio.

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Definitions:

Par Value

The face value or nominal value of a stock or bond, set by the issuing company.

Credit Derivatives

Financial instruments used to manage exposure to credit risk by transferring it from one party to another without transferring the underlying assets.

Recovery Value

The estimated amount that can be reclaimed from an asset at the end of its useful life.

Convertible Bond

A type of bond that can be converted into a predetermined number of the issuer's stock shares.