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

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.

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

Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements.What are the three elements that the analyst needs to measure?

One rationale for using expected dividends in valuation is:

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

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

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

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?

The CAPM computes expected rates of return on common equity capital using the following model: $\mathrm { E } \left[ \mathrm { R } _ { \mathrm { Ej } } \right] = \mathrm { E } \left[ \mathrm { R } _ { \mathrm { F } } \right] + \beta _ { \mathrm { j } } \mathrm { X } \left\{ \mathrm { E } \left[ \mathrm { R } _ { \mathrm { M } } \right] - \mathrm { E } \left[ \mathrm { R } _ { \mathrm { F } } \right] \right\}$ What are the roles of each of the three components of this model?

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:

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

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Tatal assets Interest-bearing debt Average pre-tax borrowring Cammon equity: Badk value Market value Incame tax rate Market equity beta \ 7460 \ 3652 10.5\% \2 950 \1 3685 35\% 1.13 -Using the above information,calculate Zonk's weighted-average cost of capital:

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?

For each of the following scenarios determine the value as of the beginning of 2012 of the continuing dividend: Forecast of Divilent in year 2016 Long-Run Grawth Forecast Cost af Capital Scenaria A \ 28 4\% 11\% Scenario B \ 54 9\% 15\% Scenario C \ 123 5\% 14\% (Amounts in thousands)

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Tatal assets Interest-bearing debt Average pre-tax borrowring Cammon equity: Badk value Market value Incame tax rate Market equity beta \ 7460 \ 3652 10.5\% \2 950 \1 3685 35\% 1.13 -Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:

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:

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?

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Tatal assets Interest-bearing debt Average pre-tax borrowring Cammon equity: Badk value Market value Incame tax rate Market equity beta \ 7460 \ 3652 10.5\% \2 950 \1 3685 35\% 1.13 -Equity-based valuation models are based on all metrics except:

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

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?