Question 1

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.

Accepted Answer

market values

Question 2

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

Accepted Answer

Leverage,systematic

Question 3

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?

Accepted Answer

1.The discount rate used to compute the present value of the future dividends.
2.The expected future dividends over the forecast horizon.
3.The expected dividend at the final period of the forecast horizon,called the continuing dividend,along with a forecast of long-term growth.

Question 4

One rationale for using expected dividends in valuation is:

Accepted Answer

A)   Dividends are a necessary payment in order for a firm to have value.
B)   Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C)   Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D)   Dividend payout ratios are set based on profitability.

Question 5

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

Accepted Answer

The answer of Explain the theory behind the dividends valuation...

Question 6

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

Accepted Answer

The answer of Why is the dividends valuation approach applicable...

Question 7

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

Accepted Answer

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

Question 8

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?

Accepted Answer

The answer of Explain why analysts and investors use risk-adjusted...

Question 9

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?

Accepted Answer

The answer of The CAPM computes expected rates of return...

Question 10

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:

Accepted Answer

A)   Share prices in the capital markets generally correlate closely with share value.
B)   Share prices do not always equal share values.
C)   Temporary deviations of price from value occur.
D)   Unexpected changes in earnings, dividends, and cash flows do not correlate closelyWith changes in stock prices.

Question 11

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

Question 12

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

Accepted Answer

A)   11.5%
B)   7.97%
C)   7.48%
D)   10.90%

Question 13

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

Question 14

For each of the following scenarios determine the value as of the beginning of 2012 of the continuing dividend:
 $\begin{array}{l}
\begin{array} { c c r c c } 
& \begin{array} { c } 
\text { Forecast of } \
\text { Divilent in } \
\text { year } 2016
\end{array} & \begin{array} { c } 
\text { Long-Run } \
\text { Grawth } \
\text { Forecast }
\end{array} & \begin{array} { c } 
\text { Cost af } \
\text { Capital }
\end{array} \

\hline \text { Scenaria A } & \$ 28 & 4\% & 11 \% \
\text { Scenario B } & \$ 54 & 9 \% & 15 \% \
\text { Scenario C } & \$ 123 & 5 \% & 14 \% \
\end{array}\
\text { (Amounts in thousands) }
\end{array}$

Accepted Answer

The answer of For each of the following scenarios determine...

Question 15

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

Accepted Answer

A)   79.00%
B)   78.3%
C)   41.8%
D)   50%

Question 16

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.

Question 17

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?

Accepted Answer

The answer of Identify the types of firm-specific factors that...

Question 18

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

Accepted Answer

A)   dividends
B)   cash flow
C)   working capital
D)   earnings.

Question 19

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

Accepted Answer

The answer of Under the assumption of clean surplus accounting,how...

Question 20

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?

Accepted Answer

The answer of Conceptually,why should an analyst expect the dividends...

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?

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?

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?

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:

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?

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?

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?

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?

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:

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?

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