Question 1

For emerging markets,the recommended input for the risk-free rate for computing beta is:

Accepted Answer

A) The domestic government bond rate. 
B) The average of the inflation rates of developed nations. 
C) The average of the government bond rates of developed nations. 
D) The U.S.Treasury bond rate plus the local inflation rate minus the U.S.inflation rate. 
A) The domestic government bond rate. 
B) The average of the inflation rates of developed nations. 
C) The average of the government bond rates of developed nations. 
D) The U.S.Treasury bond rate plus the local inflation rate minus the U.S.inflation rate. D

Question 2

For estimating the cost of capital in emerging markets,other models are superior to the capital asset pricing model (CAPM).

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following best represents the relevance of purchasing power parity (PPP )when analyzing companies in emerging markets?

Accepted Answer

A) PPP does not hold between emerging and developed economies. 
B) PPP holds over the long run,and exchange rates will adjust to inflation differentials. 
C) PPP holds over the long run,but exchange rates will not adjust to inflation differentials. 
D) It is not clear whether PPP holds,because there is not yet enough evidence one way or the other. 
A) PPP does not hold between emerging and developed economies. 
B) PPP holds over the long run,and exchange rates will adjust to inflation differentials. 
C) PPP holds over the long run,but exchange rates will not adjust to inflation differentials. 
D) It is not clear whether PPP holds,because there is not yet enough evidence one way or the other. B

Question 4

As long as international investors have access to an emerging market's local investment opportunities,local prices will be based on an international cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

In applying the CAPM in estimating the cost of capital in an emerging market,explain the three problems in estimating an appropriate risk-free rate and the recommended solution.

Accepted Answer

In emerging markets,the risk-free rate i

Question 6

Using a scenario approach,an analyst finds that the estimated value of a company is $800.The business-as-usual scenario forecasts a cash flow of $40 starting next year and then growing at 6 percent forever.The cost of capital in that scenario is 10 percent.Given this information,what is the implied risk premium to add to the cost of capital to make the analyst's results consistent with the country risk premium discounted cash flow (DCF )approach?

Accepted Answer

A) 0.80 percent. 
B) 1.00 percent. 
C) 1.20 percent. 
D) 1.25 percent. 
A) 0.80 percent. 
B) 1.00 percent. 
C) 1.20 percent. 
D) 1.25 percent.

Question 7

Which of the following are reasons an analyst should allow for changes in cost of capital in an emerging market?
I.Reforms in the tax system.
II.Changes in the cost of debt.
III.Evolving inflation expectations.
IV.Changes in a company's capital structure.

Accepted Answer

A) I and II only. 
B) I,III,and IV only. 
C) II and IV only. 
D) I,II,III,and IV. 
A) I and II only. 
B) I,III,and IV only. 
C) II and IV only. 
D) I,II,III,and IV.

Question 8

Given the following information for a company in a developing market,estimate the value of the company.The cash for the next year is estimated to be either $200 in the business-as-usual scenario or $50 in the distress scenario.The probabilities of the scenarios are 80 percent and 20 percent,respectively.The expected perpetual growth rate in each case is 5 percent per year,and the cost of capital is 11 percent.The value of the company is closest to:

Accepted Answer

A) $1,654.55 
B) $2,500.00 
C) $2,833.33 
D) $3,333.33 
A) $1,654.55 
B) $2,500.00 
C) $2,833.33 
D) $3,333.33

Question 9

In a two-scenario model of an emerging market,it is recommended that the analyst create a base-case set of forecasts and a set of forecasts associated with a period of economic distress.Which of the following best represents the range of probability weights to assign the economic distress scenario?

Accepted Answer

A) 5 to 10 percent. 
B) 10 to 20 percent. 
C) 20 to 30 percent. 
D) 30 to 40 percent. 
A) 5 to 10 percent. 
B) 10 to 20 percent. 
C) 20 to 30 percent. 
D) 30 to 40 percent.

Question 10

For emerging markets,the recommended market input for computing beta is:

Accepted Answer

A) A small-cap index. 
B) A median-cap index. 
C) A global market index. 
D) An index of non-investment-grade bonds. 
A) A small-cap index. 
B) A median-cap index. 
C) A global market index. 
D) An index of non-investment-grade bonds.

Question 11

Which of the following is NOT an argument against the country risk premium approach?

Accepted Answer

A) Most country risks,including expropriation,devaluation,and war,are largely diversifiable. 
B) Risks apply unequally to companies in a given country. 
C) There is no systematic method to calculate a country risk premium. 
D) It is bound to be below the growth rate,and that limits its application. 
A) Most country risks,including expropriation,devaluation,and war,are largely diversifiable. 
B) Risks apply unequally to companies in a given country. 
C) There is no systematic method to calculate a country risk premium. 
D) It is bound to be below the growth rate,and that limits its application.

Exam 31: Emerging Markets

For emerging markets,the recommended input for the risk-free rate for computing beta is:

For estimating the cost of capital in emerging markets,other models are superior to the capital asset pricing model (CAPM).

Which of the following best represents the relevance of purchasing power parity (PPP )when analyzing companies in emerging markets?

As long as international investors have access to an emerging market's local investment opportunities,local prices will be based on an international cost of capital.

In applying the CAPM in estimating the cost of capital in an emerging market,explain the three problems in estimating an appropriate risk-free rate and the recommended solution.

Which of the following are reasons an analyst should allow for changes in cost of capital in an emerging market? I.Reforms in the tax system. II.Changes in the cost of debt. III.Evolving inflation expectations. IV.Changes in a company's capital structure.

In a two-scenario model of an emerging market,it is recommended that the analyst create a base-case set of forecasts and a set of forecasts associated with a period of economic distress.Which of the following best represents the range of probability weights to assign the economic distress scenario?

For emerging markets,the recommended market input for computing beta is:

Which of the following is NOT an argument against the country risk premium approach?

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

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