Deck 9: Discounting and Valuation

Question 1

Which of the following is an accurate algebraic expression of the dividend discount model? (S₀ is the share price,div₁ is the next year's forecasted dividend per share,r is the discount rate,and g is the dividend growth rate.)

A)S₀ =div₁ $\div$ (1 - r - g)
B)S₀ =div₁ $\div$ (r - g)
C)S₀ =div₁ $\div$ (1 - r + g)
D)S₀ =div₁ $\div$ (g - r)

Answer 1

S₀ =div₁ $\div$ (r - g)

Question 2

The _____ is the rate obtained from observed rates of appreciation directly.

A)real discount rate
B)nominal discount rate
C)inflation adjusted rate
D)risk-free rate

Answer 2

B

Question 3

Bases on IFRS,which of the following equations is used to calculate unlevered cash flows from the accounting cash flow statement?

A)Unlevered cash flow = Profit before interest and taxes + Depreciation and amortization - Change in working capital - Capital expenditures + Sales of capital assets ? (Profit before interest and taxes ? tax rate)
B)Unlevered cash flow = Profit before interest and taxes + Depreciation and amortization - Change in working capital - Capital expenditures + Sales of capital assets ? Net realized capital gains ? (Profit before interest and taxes ? tax rate)
C)Unlevered cash flow = Operating cash inflow + Investing cash inflow - Debt interest - Debt interest tax subsidy
D)Unlevered cash flow = Net cash flow from operating activities + Net cash flow from investing activities - Debt interest tax subsidy

Answer 3

D

Question 4

Which of the following equation is used to calculate unlevered cash flow from the income statement?

A)Unlevered cash flow = Profit before interest and taxes + Depreciation and amortization - Change in working capital - Capital expenditures + Sales of capital assets - (Profit before interest and taxes $\times$ tax rate)
B)Unlevered cash flow = Operating cash inflow + Investing cash inflow - Debt interest - Debt interest tax subsidy
C)Unlevered cash flow = Profit before interest and taxes + Depreciation and amortization - Change in working capital - Capital expenditures + Sales of capital assets - Net realized capital gains - (Profit before interest and taxes $\times$ tax rate)
D)Unlevered cash flow = Net cash flow from operating activities + Net cash flow from investing activities + Debt interest tax subsidy

Question 5

In forecasting PPE,which of the following gives the most accurate result if PPE must increase with units produced?

A)The direct method
B)The more of the same method
C)The percentage of sales method
D)The double-declining method

Question 6

Unlevered cash flows are:

A)cash flows generated directly from the real assets of a project or firm.
B)cash flows after the interest-based tax deductions from debt financing.
C)cash flows associated with the issuance or retirement of debt.
D)cash flows associated with the interest payments.

Question 7

Deferred taxes:

A)arise when financing costs are expensed immediately and are not capitalised.
B)arise from timing differences between when the company prepares taxes on its financial statements and makes tax payments.
C)refer to the reduction in corporate taxes as a result of taking an allowable deduction from the taxable income.
D)arise from timing differences between when the company reports taxes on its financial statements and makes tax payments.

Question 8

Holding all other variables constant,discounting rates using which of the following compounding methods will result in the maximum future value?

A)Semi-annually compounded
B)Monthly compounded
C)Weekly compounded
D)Daily compounded

Question 9

Explain the financial forecast of a cash flow statement.

Question 10

What are unlevered cash flows?

Question 11

John invests £10,000 in a security and expects its value to double in five years.In what percentage should the security grow to get doubled?

A)13.23%
B)12%
C)11.48%
D)14.86%

Question 12

Zeta Corporation has issued preferred stocks with no maturity and the annual dividend payment is €25.6.If the rate of return is 8%,find the value of the firm.

A)€23.7
B)€320
C)€2.048
D)€27.64

Question 13

_____ cash flows are the cash flows of a firm with a project less the cash flows of the firm if the project were turned down.

A)Operating
B)Sunk
C)Incremental
D)Opportunity

Question 14

Which of the following is the correct mathematical expression used to calculate the new PPE?

A)New PPE = Old PPE + Capital investments + Depreciation - Sales of assets
B)New PPE = Old PPE + Capital investments - Depreciation - Sales of assets
C)New PPE = Old PPE - Capital investments - Depreciation + Sales of assets
D)New PPE = Old PPE + Capital investments + Depreciation + Sales of assets

Question 15

Explain annuities and perpetuities

Question 16

Explain the concept of growing annuities.

Question 17

Which of the following is true of accounting cash flows?

A)Accounting cash flows and unlevered cash flows are essentially the same.
B)Accounting cash flows includes cash flows arising from the financing of the firm.
C)Accounting cash flows are made up of operating cash flows and exclude financing cash flows.
D)Accounting cash flows are made up of financing cash flows and exclude operating cash flows.

Question 18

The rate of return used to calculate the present value of the estimated future cash flows of a project is called the _____.

A)discount rate
B)compound rate
C)risk-free rate
D)nominal rate

Question 19

A stream of annuity payments that will never end is known as a(n)_____.

A)perpetuity
B)imbedded annuity
C)unlimited annuity
D)annuity due