Question 1

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 2

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 3

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company:
  Using the above information and assuming that steady-state growth in year 2017 and beyond will be 4% calculate Shady Sunglasses value per share.

Accepted Answer

The answer of Shady Sunglasses operates retail sunglass kiosks in...

Question 4

According to the text,dividends are value-relevant even though the firm's dividend policy is irrelevant.How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Accepted Answer

The answer of According to the text,dividends are value-relevant even...

Question 5

Zonk Corp.
The following data pertains to Zonk Corp. ,a manufacturer of ball bearings (dollar amounts in millions): 
-Assuming that riskless rate is 4.6% and the market premium is 7.3%,calculate Zonk's cost of equity capital:

Accepted Answer

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

Question 6

Equity-based valuation models are based on all metrics except:

Accepted Answer

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

Question 7

Zonk Corp.
The following data pertains to Zonk Corp. ,a manufacturer of ball bearings (dollar amounts in millions): 
-Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital:

Accepted Answer

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

Question 8

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 9

Because the market equity beta reflects the level of operating leverage,financial leverage,variability of sales,and other characteristics of a firm,there are situations where an analyst might have to adjust the beta because of changes in the capital structure.A situation that might require an analyst to estimate a new levered beta is a(n)___________________________________.

Accepted Answer

The answer of Because the market equity beta reflects the...

Question 10

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%

Question 11

Why are dividends value-relevant to common equity shareholders?

Accepted Answer

The answer of Why are dividends value-relevant to common equity...

Question 12

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.

Accepted Answer

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

Question 13

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?

Accepted Answer

A)  Nearly perfect correlation 
B)  Perfect correlation 
C)  No correlation 
D)  Unable to tell without specifics about the portfolio

Question 14

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 15

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

The answer of Implementing a dividend valuation model to determine...

Question 16

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 17

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?

Accepted Answer

The answer of The dividends valuation approach measures value-relevant dividends...

Question 18

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 closely
With changes in stock prices.

Question 19

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

The answer of One criticism in using the CAPM to...

Question 20

Zonk Corp.
The following data pertains to Zonk Corp. ,a manufacturer of ball bearings (dollar amounts in millions): 
-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%

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

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

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

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company: Using the above information and assuming that steady-state growth in year 2017 and beyond will be 4% calculate Shady Sunglasses value per share.

According to the text,dividends are value-relevant even though the firm's dividend policy is irrelevant.How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Zonk Corp. The following data pertains to Zonk Corp. ,a manufacturer of ball bearings (dollar amounts in millions) : -Assuming that riskless rate is 4.6% and the market premium is 7.3%,calculate Zonk's cost of equity capital:

Equity-based valuation models are based on all metrics except:

Zonk Corp. The following data pertains to Zonk Corp. ,a manufacturer of ball bearings (dollar amounts in millions) : -Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital: