Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
Exam 1: Overview of Financial Reporting, Financial Statement Analysis, and Valuation91 Questions
Exam 2: Asset and Liability Valuation and Income Recognition70 Questions
Exam 3: Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows74 Questions
Exam 4: Profitability Analysis86 Questions
Exam 5: Risk Analysis69 Questions
Exam 6: Financing Activities70 Questions
Exam 7: Investing Activities60 Questions
Exam 8: Operating Activities92 Questions
Exam 9: Accounting Quality68 Questions
Exam 10: Forecasting Financial Statements51 Questions
Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach44 Questions
Exam 12: Valuation: Cash-Flow Based Approaches52 Questions
Exam 13: Valuation: Earnings-Based Approaches49 Questions
Exam 14: Valuation: Market-Based Approaches55 Questions
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Provide the rationale for using expected dividends in a valuation model.
(Essay)
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With respect to dividends and priority in liquidation, what has priority over common stock?
(Multiple Choice)
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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.
(Short Answer)
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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.
(Multiple Choice)
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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?
(Essay)
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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.
(Multiple Choice)
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Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equity holders in order to value the firm?
(Essay)
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Equity-based valuation models are based on all metrics except:
(Multiple Choice)
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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?
(Essay)
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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 :
(Multiple Choice)
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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 :
(Multiple Choice)
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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?
(Multiple Choice)
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Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:
(Multiple Choice)
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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.
(Short Answer)
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Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?
(Essay)
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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.
(Short Answer)
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A company with a new Capital structure will increase the __________ and at the same time the __________ risk.
(Short Answer)
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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?
(Essay)
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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:
(Multiple Choice)
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