Question 1

Provide the rationale for using expected dividends in a valuation model.

Accepted Answer

1. Cash is the primary medium of exchang

Question 2

With respect to dividends and priority in liquidation, what has priority over common stock?

Accepted Answer

A)  treasury stock 
B)  debt capital 
C)  preferred stock 
D)  nonconvertible common equity 
A)  treasury stock 
B)  debt capital 
C)  preferred stock 
D)  nonconvertible common equity

Question 3

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

Accepted Answer

The answer of A company with a market beta of...

Question 4

Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

Accepted Answer

A)  4.35 
B)  4.77 
C)  4.34 
D)  3.91 
A)  4.35 
B)  4.77 
C)  4.34 
D)  3.91

Question 5

Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable, financially healthy, profitable, tax-paying firm that has been financed with all equity and no debt decides to add a reasonable amount of debt to its capital structure. What effect will that change in capital structure likely have on the firm's weighted average cost of capital?

Accepted Answer

Investors typically accept a lower risk-

Question 6

Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

Accepted Answer

A)  8.85% 
B)  12.56% 
C)  13.01% 
D)  9.94% 
A)  8.85% 
B)  12.56% 
C)  13.01% 
D)  9.94%

Question 7

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equity holders in order to value the firm?

Accepted Answer

Under the assumption of clean surplus ac

Question 8

Equity-based valuation models are based on all metrics except:

Accepted Answer

A)  dividends 
B)  cash flow 
C)  working capital 
D)  earnings 
A)  dividends 
B)  cash flow 
C)  working capital 
D)  earnings

Question 9

Identify the types of firm-specific factors that increase a firm's nondiversifiable risk (systematic risk). Identify the types of firm-specific factors that increase a firm's diversifiable risk (idiosyncratic risk or nonsystematic risk). Why do models of risk-adjusted expected returns include no expected return premia for diversifiable risk?

Accepted Answer

Firm-specific factors that increase the

Question 10

Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except :

Accepted Answer

A)  Share prices in the capital markets generally correlate closely with share value. 
B)  Share prices do not always equal share values. 
C)  Temporary deviations of price from value occur. 
D)  Unexpected changes in earnings, dividends, and cash flows do not correlate closely with changes in stock prices. 
A)  Share prices in the capital markets generally correlate closely with share value. 
B)  Share prices do not always equal share values. 
C)  Temporary deviations of price from value occur. 
D)  Unexpected changes in earnings, dividends, and cash flows do not correlate closely with changes in stock prices.

Question 11

Why are dividends value-relevant to common equity shareholders?

Accepted Answer

Dividends are value-relevant t

Question 12

The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future, when all of the following conditions hold true except :

Accepted Answer

A)  The current risk of the firm is the same as the expected future risk of the firm. 
B)  Expected future interest rates are likely to equal current interest rates. 
C)  The existing capital structure of the firm is the same as the expected future capital structure of the firm. 
D)  The current mix of debt and equity financing is equal. 
A)  The current risk of the firm is the same as the expected future risk of the firm. 
B)  Expected future interest rates are likely to equal current interest rates. 
C)  The existing capital structure of the firm is the same as the expected future capital structure of the firm. 
D)  The current mix of debt and equity financing is equal.

Question 13

If a firm has a market beta of 0.9, is subject to an income tax rate of 35 percent, has a risk-free rate of 6 percent, a market risk premium of 7 percent, and has a market value of debt to market value of equity ratio of 60 percent, what does the market expect the firm to generate in terms of equity returns using CAPM?

Accepted Answer

A)  6% 
B)  7% 
C)  12.3% 
D)  13% 
A)  6% 
B)  7% 
C)  12.3% 
D)  13%

Question 14

Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:

Accepted Answer

A)  debt is typically less risky because fixed claims bear less residual risk than equity claims. 
B)  equity bears less residual risk than debt. 
C)  equity capital costs are tax deductible. 
D)  the yield to maturity on equity is inversely related to its market value. 
A)  debt is typically less risky because fixed claims bear less residual risk than equity claims. 
B)  equity bears less residual risk than debt. 
C)  equity capital costs are tax deductible. 
D)  the yield to maturity on equity is inversely related to its market value.

Question 15

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

Accepted Answer

The answer of To determine the appropriate weights to use...

Question 16

Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?

Accepted Answer

The dividends valuation approach is appl

Question 17

One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.

Accepted Answer

market bet

Question 18

A company with a new Capital structure will increase the __________ and at the same time the __________ risk.

Accepted Answer

Leverage,

Question 19

Conceptually, why should an analyst expect the dividends valuation approach to yield equivalent value estimates to the valuation approach that is based on free cash flows available to be distributed to common equity shareholders?

Accepted Answer

Conceptually, the dividends valuation ap

Question 20

Under the cash-flow-based valuation approach, free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:

Accepted Answer

A)  t his approach focuses on earnings as a measure of the capital that a firm creates. 
B)  over the life of the firm, the free cash flows into the firm and cash flows paid out of the firm in dividends to shareholders will be equivalent. 
C)  over the life of the firm, the free cash flows out of the firm for investments and cash flows paid into the firm in dividends from these investments will be equivalent. 
D)  this approach focuses on wealth distribution to shareholders. 
A)  t his approach focuses on earnings as a measure of the capital that a firm creates. 
B)  over the life of the firm, the free cash flows into the firm and cash flows paid out of the firm in dividends to shareholders will be equivalent. 
C)  over the life of the firm, the free cash flows out of the firm for investments and cash flows paid into the firm in dividends from these investments will be equivalent. 
D)  this approach focuses on wealth distribution to shareholders.

Provide the rationale for using expected dividends in a valuation model.

With respect to dividends and priority in liquidation, what has priority over common stock?

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equity holders in order to value the firm?

Equity-based valuation models are based on all metrics except:

Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except :

Why are dividends value-relevant to common equity shareholders?

The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future, when all of the following conditions hold true except :

Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?

One criticism in using the CAPM to calculate the cost of equity capital is that and the ____________________ are quite sensitive to the time period and methodology used in their computation.

A company with a new Capital structure will increase the and at the same time the risk.

Conceptually, why should an analyst expect the dividends valuation approach to yield equivalent value estimates to the valuation approach that is based on free cash flows available to be distributed to common equity shareholders?

Under the cash-flow-based valuation approach, free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Financing Activities

Investing Activities

Operating Activities

Accounting Quality

Forecasting Financial Statements

Valuation: Cash-Flow Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

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

Provide the rationale for using expected dividends in a valuation model.

With respect to dividends and priority in liquidation, what has priority over common stock?

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equity holders in order to value the firm?

Equity-based valuation models are based on all metrics except:

Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except :

Why are dividends value-relevant to common equity shareholders?

The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future, when all of the following conditions hold true except :

Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?

One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.

A company with a new Capital structure will increase the __________ and at the same time the __________ risk.

Conceptually, why should an analyst expect the dividends valuation approach to yield equivalent value estimates to the valuation approach that is based on free cash flows available to be distributed to common equity shareholders?

Under the cash-flow-based valuation approach, free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Financing Activities

Investing Activities

Operating Activities

Accounting Quality

Forecasting Financial Statements

Valuation: Cash-Flow Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

One criticism in using the CAPM to calculate the cost of equity capital is that and the ____________________ are quite sensitive to the time period and methodology used in their computation.

A company with a new Capital structure will increase the and at the same time the risk.