Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): $\begin{array}{l} \begin{array} { l } \text { Tatal assets } \\ \text { Interest-bearing debt } \\ \text { Average pre-tax borrowring } \\ \text { Cammon equity: } \\ \text { Badk value } \\ \text { Market value } \\ \text { Incame tax rate } \\ \text { Market equity beta } \end{array} \begin{array} { r } \$ 7460\\ \$ 3652\\ 10.5 \%\\ \\ \$2950 \\ \$13685 \\ 35\% \\ 1.13 \end{array} \end{array}$ -Assuming that riskless rate is 4.6% and the market premium is 7.3%,calculate Zonk's cost of equity capital:

A) 10.4% B) 7.69% C) 11.89% D) 8.28% A) 10.4% B) 7.69% C) 11.89% D) 8.28%

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): $\begin{array}{l} \begin{array} { l } \text { Tatal assets } \\ \text { Interest-bearing debt } \\ \text { Average pre-tax borrowring } \\ \text { Cammon equity: } \\ \text { Badk value } \\ \text { Market value } \\ \text { Incame tax rate } \\ \text { Market equity beta } \end{array} \begin{array} { r } \$ 7460\\ \$ 3652\\ 10.5 \%\\ \\ \$2950 \\ \$13685 \\ 35\% \\ 1.13 \end{array} \end{array}$ -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.

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

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. $\begin{array} { | l | r | r | r| } \hline ( \$ \text { amounts in millians) } & \text { Watsan } & \text { Intra } & \text { Trentan } \\ \hline \text { Total Assets } & \$ 13,532 & \$ 109,524 & \$ 44,106 \\ \hline \text { Interest-Bearing Debt } & \$ 2,597 & \$ 33,925 & \$ 18,752 \\ \hline \text { Average Pretar Barrowing Cost } & 6.1 \% & 4.3 \% & 4.9 \% \\ \hline \text { Cammon Equity: } & & & \\ \hline \text { Book Value } & \$ 3,006 & \$ 13,465 & \$ 13,712 \\ \hline \text { Market Value } & \$ 2,959 & \$ 110,984 & \$ 22,521 \\ \hline \text { Income Tax Rate } & 35.0 \% & 35.0 \% & 35.0 \% \\ \hline \text { Market Equity Beta } & 2.27 & 0.7 & 1.2 \\ \hline \end{array}$ 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.

@#IMG-DLM& Note that a large part of the high lev

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): $\begin{array}{l} \begin{array} { l } \text { Tatal assets } \\ \text { Interest-bearing debt } \\ \text { Average pre-tax borrowring } \\ \text { Cammon equity: } \\ \text { Badk value } \\ \text { Market value } \\ \text { Incame tax rate } \\ \text { Market equity beta } \end{array} \begin{array} { r } \$ 7460\\ \$ 3652\\ 10.5 \%\\ \\ \$2950 \\ \$13685 \\ 35\% \\ 1.13 \end{array} \end{array}$ -Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital:

A) 21.7% B) 21.00% C) 50% D) 58.2% A) 21.7% B) 21.00% C) 50% D) 58.2%

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

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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Question 21

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?

(Multiple Choice)

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Question 22

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

(Multiple Choice)

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Question 23

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

(Multiple Choice)

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Question 24

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

(Essay)

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Question 25

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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Question 26

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.

(Essay)

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Question 27

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: Total Assets Interest-Bearing Debt Average Pre-taxborrowing cost Common Equity: Book Value Market Value Income Tax Rate Market Equity Beta Risk-free Rate Market Premium \ 25,675 \ 18,525 9.25\% \ 8,950 \ 34,956 35\% 1.05 3.8\% 5.7\% -An analyst wants to value the common shareholders' equity of Bridgetron,compute the relevant cost of capital that should be used.

(Essay)

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Question 28

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 -Assuming that riskless rate is 4.6% and the market premium is 7.3%,calculate Zonk's cost of equity capital:

(Multiple Choice)

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Question 29

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

(Short Answer)

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Question 30

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?

(Essay)

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Question 31

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 -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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Question 32

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

(Essay)

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Question 33

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. (\ amounts in millians) Watsan Intra Trentan Total Assets \ 13,532 \ 109,524 \ 44,106 Interest-Bearing Debt \ 2,597 \ 33,925 \ 18,752 Average Pretar Barrowing Cost 6.1\% 4.3\% 4.9\% Cammon Equity: Book Value \ 3,006 \ 13,465 \ 13,712 Market Value \ 2,959 \ 110,984 \ 22,521 Income Tax Rate 35.0\% 35.0\% 35.0\% Market Equity Beta 2.27 0.7 1.2 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.

(Essay)

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Question 34

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:

(Multiple Choice)

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Question 35

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

(Multiple Choice)

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Question 36

The following data pertain to Loren Corporation (dollar amounts in thousands): Total Assets \ 10,254 Interest-Bearing Debt \ 1,257 Average Pre-taxborrowing cost 9.20\% Common Equity: Book Value \ 5,624 Market Value \ 21,479 Income Tax Rate 32\% Market Equity Beta 1.56 Riskless interest rate 3.8\% Market risk premium 6.5\% Using this information,calculate the following: a.Loren Corporation's cost of equity capital b.The weight on debt capital that should be used to calculate Loren's weighted-average cost of capital. c.Loren Corporation's weighted-average cost of capital

(Essay)

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Question 37

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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Question 38

For each of the following companies,determine the total dividends paid to common equity holders in order to value the firm: (amounts in thousands) Dividends Paid to Common \ 124 \ 2,134 \ 325 Shareholders Common Stock Repurchases \ 412 \ 140 \ 1,247 Common Stock Issued \ 95 \ 1,985 \ 145

(Essay)

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Question 39

The following financial statement data pertains to Outside,Inc.,a manufacturer of men's outerwear (dollar amounts in millions): Total Assets Interest-Bearing Debt Average Pre-tax barraning Camman Equity: Badk Value Market Value Incame Tax Rate Market Equity Beta Market Premium Risk-Fe interest rate \ 145,782 \ 30,659 9.25\% \ 22,515 \ 60,843 42\% 0.88 8.5\% 2.4\% Required: a.Calculate the company's cost of equity capital. b.Calculate the weight on debt capital that should be used to determine Outside's weighted-average cost of capital. c.Calculate the weight on equity capital that should be used to determine Outside's weighted-average cost of capital. d.Calculate Outside's weighted-average cost of capital.

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Question 40

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.

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?

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

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

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

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:

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.

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

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?

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

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:

For each of the following companies,determine the total dividends paid to common equity holders in order to value the firm: (amounts in thousands) Dividends Paid to Common \ 124 \ 2,134 \ 325 Shareholders Common Stock Repurchases \ 412 \ 140 \ 1,247 Common Stock Issued \ 95 \ 1,985 \ 145

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

Accounting Quality

Financing Activities

Investing Activities

Operating Activities

Forecasting Financial Statements

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

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