Homework 8

Homework 8 - Jonathan Sadow Eighth Homework 1. Other things...

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Jonathan Sadow Eighth Homework 1. Other things being equal (such as future growth rates, required rates of return and so forth), should a firm that manages its earnings upwards have a higher or lower price to earnings ratio than a firm that reports the same earnings but that does not manage its earnings? Why? Assume that market participants realize that the firm manages its earnings. When a firm manages its earnings you may have to assume that certain parts of its earnings are not going to stick and will eventually go away thus making it have a lower price to earnings ratio. Expected earnings for a firm not managing their earnings should be higher than a firm that does. 2. Suppose an executive gets a bonus equal to 1% of reported earnings each year with a $1,000,000 upper limit on the size of the bonus. Suppose that in the absence of earnings management, profits this year and next year would be $105,000,000 and $80,000,000, respectively. Explain why the manager might want to manage earnings to reduce profits this year and increase profits next year. If there was no limit on the size of the annual bonus would the executive be likely to shift profits to future years? Why or
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This note was uploaded on 10/20/2010 for the course ACCY 110 taught by Professor Christopherjones during the Spring '10 term at GWU.

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Homework 8 - Jonathan Sadow Eighth Homework 1. Other things...

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