Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Assuming that riskless rate is 4.6% and the market premium is 7.3%, calculate Zonk 's cost of equity capital:

In theory, the value of a share of common equity is the present value of ____________________________________________________________.

One rationale for using expected dividends in valuation is:

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b _j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?

Determine the weight on equity capital that should be used to calculate Zonk 's weighted-average cost of capital:

Using the above information, calculate Zonk 's weighted-average cost of capital:

Returns on systematic risk-free securities (like U.S. Treasury securities) should exhibit what type of correlation with returns on a diversified market wide portfolio of stocks?

All of the following are steps in the analysis and valuation framework used to understand the fundamentals of a business and determine estimates of its value except :

The dividends valuation approach measures value-relevant dividends to encompass various transactions between the firm and the common shareholders. What transactions should the analyst include in value-relevant dividends for purposes of implementing the dividends valuation model? Why?

According to the text, dividends are value-relevant even though the firm's dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except :

If dividend projections include the effect of inflation, then the discount rate used should be a(n) ____________________ rate.

Which of the following is not a problem with using a dividend-based valuation formula?

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

When deriving the equity value of a firm, an analyst forecasts the real dividends expected to be paid in the future. In this case, which discount rate should be used?

Determine the weight on debt capital that should be used to calculate Zonk 's weighted-average cost of capital:

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.