Question 1

Both public and private firms are subject to non-diversifiable risk.

Accepted Answer

A) True 
 B)False  True

Question 2

Studies show that the market risk premium is unstable, lower during periods of prosperity and higher during periods of economic slowdowns.

Accepted Answer

A) True 
 B)False  True

Question 3

The relationship between the overall market and a specific firm's beta may change significantly if a large sector of stocks that make up the overall index increase or decrease substantially.

Accepted Answer

A) True 
 B)False  True

Question 4

A three-month Treasury bill rate is not free of risk for a five- or ten-year period, since interest and principal received at maturity must be reinvested at three month intervals.

Accepted Answer

A) True 
 B)False

Question 5

You have been asked to estimate the beta of a high-technology firm, which has three divisions with the following characteristics.
 $$\begin{array} { l l l } 
\text { Division } & \text { Beta } & \text { Narket Value } \
\text { Personal Computers } & 1.6 & \$ 100 \text { million } \
\text { Sofware } & 2.00 & \$ 150 \text { million } \
\text { Compute Nainframes } & 1.2 & \$ 250 \text { million }
\end{array}$$ 
a. What is the beta of the equity of the firm?
b. If the risk free return is 5% and the spread between the return on all stocks is 5.5%, estimate the
cost of equity for the software division?
c. What is the cost of equity for the entire firm?
d. Free cash flow to equity investors in the current year (FCFE) for the entire firm is $7.4 million
and for the software division is $3.1 million. If the total firm and the software division are
expected to grow at the same 8% rate into the foreseeable future, estimate the market value of the
firm and of the software division.

Accepted Answer

a a. Beta = 1.6 x 100/500 + 2.00 x 150/5

Question 6

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm's market value.

Accepted Answer

A) True 
 B)False

Question 7

Beta is a measure of non-diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 8

The capital asset pricing model is commonly used to estimate the cost of equity.

Accepted Answer

A) True 
 B)False

Question 9

The cost of capital formula can be generalized to include hybrid sources of funds available to firms such as convertible preferred and debt.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is true of the equity valuation model?

Accepted Answer

A)  Discounts free cash flow to the firm by the weighted average cost of capital 
B)  Discounts free cash flow to equity by the cost of equity 
C)  Discounts free cash flow the firm by the cost of equity 
D)  Discounts free cash flow to equity by the weighted average cost of capital 
E)  None of the above 
A)  Discounts free cash flow to the firm by the weighted average cost of capital 
B)  Discounts free cash flow to equity by the cost of equity 
C)  Discounts free cash flow the firm by the cost of equity 
D)  Discounts free cash flow to equity by the weighted average cost of capital 
E)  None of the above

Question 11

Why is it important to distinguish between operating and on-operating assets and liabilities when valuing a firm? Be specific.

Accepted Answer

Operating assets and liabilities are dir

Question 12

The projected cash flow of firms in highly cyclical industries can be distorted depending on where the firm is in the business cycle.

Accepted Answer

A) True 
 B)False

Question 13

The unlevered beta reflects the firm's degree of cyclicality and operating leverage but not financial leverage.

Accepted Answer

A) True 
 B)False

Question 14

Free cash flow to the firm is calculated before debt and taxes.

Accepted Answer

A) True 
 B)False

Question 15

For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e., the rate of return that can be earned at the end of the investor's holding period).

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true about the variable growth model?

Accepted Answer

A)  Present value equals the discounted sum of the annual forecasts of cash flow 
B)  Present value equals the discounted sum of the annual forecasts of cash flow plus the discounted value of the terminal value 
C)  Present value equals the discounted value of the next year's cash flow grown at a constant rate in perpetuity 
D)  Present value equals the current year's free cash flow discounted in perpetuity 
E)  None of the above 
A)  Present value equals the discounted sum of the annual forecasts of cash flow 
B)  Present value equals the discounted sum of the annual forecasts of cash flow plus the discounted value of the terminal value 
C)  Present value equals the discounted value of the next year's cash flow grown at a constant rate in perpetuity 
D)  Present value equals the current year's free cash flow discounted in perpetuity 
E)  None of the above

Question 17

Why is it appropriate to utilize at least a 10-year annual time horizon before estimating a terminal value in valuing firm's such as 3PAR?

Accepted Answer

The length of the annual forecast period

Question 18

Preferred stock exhibits some of the characteristics of long-term debt in that its dividend is generally constant and preferred stockholders are paid before common shareholders in the event the firm is liquidated.

Accepted Answer

A) True 
 B)False

Question 19

The constant growth valuation model is primarily applicable to firms in mature markets.

Accepted Answer

A) True 
 B)False

Question 20

Estimate 3PAR's equity value per share based on the assumptions and selected 3PAR data provided in Table 7.12?

Accepted Answer

$49.20. See the Excel spread s

Both public and private firms are subject to non-diversifiable risk.

Studies show that the market risk premium is unstable, lower during periods of prosperity and higher during periods of economic slowdowns.

The relationship between the overall market and a specific firm's beta may change significantly if a large sector of stocks that make up the overall index increase or decrease substantially.

A three-month Treasury bill rate is not free of risk for a five- or ten-year period, since interest and principal received at maturity must be reinvested at three month intervals.

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm's market value.

Beta is a measure of non-diversifiable risk.

The capital asset pricing model is commonly used to estimate the cost of equity.

The cost of capital formula can be generalized to include hybrid sources of funds available to firms such as convertible preferred and debt.

Which of the following is true of the equity valuation model?

Why is it important to distinguish between operating and on-operating assets and liabilities when valuing a firm? Be specific.

The projected cash flow of firms in highly cyclical industries can be distorted depending on where the firm is in the business cycle.

The unlevered beta reflects the firm's degree of cyclicality and operating leverage but not financial leverage.

Free cash flow to the firm is calculated before debt and taxes.

For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e., the rate of return that can be earned at the end of the investor's holding period).

Which of the following is true about the variable growth model?

Why is it appropriate to utilize at least a 10-year annual time horizon before estimating a terminal value in valuing firm's such as 3PAR?

Preferred stock exhibits some of the characteristics of long-term debt in that its dividend is generally constant and preferred stockholders are paid before common shareholders in the event the firm is liquidated.

The constant growth valuation model is primarily applicable to firms in mature markets.

Estimate 3PAR's equity value per share based on the assumptions and selected 3PAR data provided in Table 7.12?

Introduction to Mergers, Acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market:

Planning: Developing Business and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

Implementation: Search Through Closing: Phases 310 of the Acquisition Process

Postclosing Integration: Mergers, Acquisitions, and Business Alliances

Relative, Asset-Oriented, and Real Option

Financial Modeling Basics:

Analysis and Valuation

Structuring the Deal:

Structuring the Deal:

Financing the Deal

Applying Financial Modeling

Business Alliances: Joint Ventures, Partnerships, Strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies

Alternative Exit and Restructuring Strategies:

Cross-Border Mergers and Acquisitions:

Filters

Exam 7: Merger and Acquisition Cash Flow Valuation Basics

Both public and private firms are subject to non-diversifiable risk.

Studies show that the market risk premium is unstable, lower during periods of prosperity and higher during periods of economic slowdowns.

The relationship between the overall market and a specific firm's beta may change significantly if a large sector of stocks that make up the overall index increase or decrease substantially.

A three-month Treasury bill rate is not free of risk for a five- or ten-year period, since interest and principal received at maturity must be reinvested at three month intervals.

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm's market value.

Beta is a measure of non-diversifiable risk.

The capital asset pricing model is commonly used to estimate the cost of equity.

The cost of capital formula can be generalized to include hybrid sources of funds available to firms such as convertible preferred and debt.

Which of the following is true of the equity valuation model?

Why is it important to distinguish between operating and on-operating assets and liabilities when valuing a firm? Be specific.

The projected cash flow of firms in highly cyclical industries can be distorted depending on where the firm is in the business cycle.

The unlevered beta reflects the firm's degree of cyclicality and operating leverage but not financial leverage.

Free cash flow to the firm is calculated before debt and taxes.

For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e., the rate of return that can be earned at the end of the investor's holding period).

Which of the following is true about the variable growth model?

Why is it appropriate to utilize at least a 10-year annual time horizon before estimating a terminal value in valuing firm's such as 3PAR?

Preferred stock exhibits some of the characteristics of long-term debt in that its dividend is generally constant and preferred stockholders are paid before common shareholders in the event the firm is liquidated.

The constant growth valuation model is primarily applicable to firms in mature markets.

Estimate 3PAR's equity value per share based on the assumptions and selected 3PAR data provided in Table 7.12?

Introduction to Mergers, Acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market:

Planning: Developing Business and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

Implementation: Search Through Closing: Phases 310 of the Acquisition Process

Postclosing Integration: Mergers, Acquisitions, and Business Alliances

Relative, Asset-Oriented, and Real Option

Financial Modeling Basics:

Analysis and Valuation

Structuring the Deal:

Structuring the Deal:

Financing the Deal

Applying Financial Modeling

Business Alliances: Joint Ventures, Partnerships, Strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies

Alternative Exit and Restructuring Strategies:

Cross-Border Mergers and Acquisitions:

Filters