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

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

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

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

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:

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

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

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?

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?

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:

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: -An analyst wants to value the common shareholders' equity of Bridgetron,compute the relevant cost of capital that should be used.

The CAPM computes expected rates of return on common equity capital using the following model: What are the roles of each of the three components of this model?

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

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.

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?

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.

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

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.

For each of the following companies,determine the total dividends paid to common equity holders in order to value the firm:

In theory,the value of a share of common equity is the present value of ____________________________________________________________.