Question 1

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

Accepted Answer

The answer of Provide the rationale for using expected dividends...

Question 2

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 3

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 4

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

Accepted Answer

A)  exposure to interest rate changes 
B)  exposure to inflation 
C)  exposure to management competence 
D)  exposure to cyclicality 
A)  exposure to interest rate changes 
B)  exposure to inflation 
C)  exposure to management competence 
D)  exposure to cyclicality

Question 5

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

Accepted Answer

The theory behind the dividends valuatio

Question 6

Watson manufactures and sells appliances.Intro develops and manufactures computer technology.Trenton operates general merchandise retail stores.Selected data for these companies appear in the following table (dollar amounts in millions).For each firm,assume that the market value of the debt equals its book value.
   Required
a.Assume that the intermediate-term yields on U.S.Treasury securities
are roughly 3.5 percent.Assume that the market risk premium is 5.0 percent.
Compute the cost of equity capital for each of the three companies.
b.Compute the weighted average cost of capital for each of the three companies.
c.Compute the unlevered market (asset)beta for each of the three companies.
Calculating the Cost of Capital.(Dollar Amounts in Millions)

Accepted Answer

Calculating the Cost of Capital.(Dollar

Question 7

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

Accepted Answer

The answer of If dividend projections include the effect of...

Question 8

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

Accepted Answer

The answer of Dividends measure the cash that ____________________ ultimately...

Question 9

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 betas,excess

Question 10

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?

Accepted Answer

A)  The nominal rate of return 
B)  The real rate of return 
C)  The risk free rate of return 
D)  The risk adjusted rate of return 
A)  The nominal rate of return 
B)  The real rate of return 
C)  The risk free rate of return 
D)  The risk adjusted rate of return

Question 11

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 12

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

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

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:

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

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

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

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

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

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.

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?

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

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

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

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

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

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:

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

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

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

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

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

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.

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?

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

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

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.