Exam 11: Equity Valuation

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach?

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm?

Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The shares of Todd Mountain Development Corporation have a beta of 0.75. Using the CAPM, the return you should require on the shares is ________.

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be ________ if it follows a policy of paying 30% of earning in the form of dividends.

Which one of the following statements about market and book value is correct?

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00. The expected ROE is 18.0%. An appropriate required return on the shares is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be ________.

The constant growth dividend discount model (DDM) can be used only when the ________.

Firm A has a share price of $35 and 60% of the value of the shares is in the form of PVGO. Firm B also has a share price of $35 but only 20% of the value of Share B is in the form of PVGO. We know that ________. I. Share A will give us a higher return than Share B II. an investment in Share A is probably riskier than an investment in Share B III. Share A has higher forecast earnings growth than Share B

Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

The greatest value to an analyst from calculating a share's intrinsic value is ________.

The market capitalisation rate on the shares of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plouwback ratio is 50%, its P/E ratio will be ________.

A firm has PVGO of 0 and a market capitalisation rate of 12%. What is the firm's P/E ratio?

Value shares are more likely to have a PEG ratio ________.

Earnings yields tend to ________ when Treasury yields fall.

A firm increases its dividend plowback ratio. All else equal you know that ________.

________ is the amount of money per common share that could be realised by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be ________.

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

Bill, Jim and Shelly are all looking to buy the same shares that pay dividends. Bill plans on holding the shares for one year. Jim plans on holding the shares for three years. Shelly plans on holding the shares until she retires in 10 years. Which one of the following statements is correct?