Question 1

According to the capital asset pricing model,risk consists of both diversifiable and non-diversifiable components.

Accepted Answer

A) True 
 B)False

Question 2

The enterprise or free cash flow to the firm approach to valuation discounts the after-tax free cash flow available to the firm from operations at the weighted average cost of capital to obtain the enterprise value.

Accepted Answer

A) True 
 B)False

Question 3

Which one of the following factors is not considered in calculating the firm's cost of equity?

Accepted Answer

A)  risk free rate of return 
B)  beta 
C)  interest rate on corporate debt 
D)  expected return on equities 
E)  difference between expected return on stocks and the risk free rate of return 
A)  risk free rate of return 
B)  beta 
C)  interest rate on corporate debt 
D)  expected return on equities 
E)  difference between expected return on stocks and the risk free rate of return

Question 4

Free cash flow to the firm is also called enterprise cash flow.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Which one of the following factors is not considered in calculating the firm's cost of capital?

Accepted Answer

A)  cost of equity 
B)  interest rate on debt 
C)  the firm's marginal tax rate 
D)  book value of debt and equity 
E)  the firm's target debt to equity ratio 
A)  cost of equity 
B)  interest rate on debt 
C)  the firm's marginal tax rate 
D)  book value of debt and equity 
E)  the firm's target debt to equity ratio

Question 7

The calculation of free cash flow to the firm includes all of the following except for

Accepted Answer

A)  Net income 
B)  Marginal tax rate 
C)  Change in working capital 
D)  Gross plant and equipment spending 
E)  Depreciation 
A)  Net income 
B)  Marginal tax rate 
C)  Change in working capital 
D)  Gross plant and equipment spending 
E)  Depreciation

Question 8

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.Consequently,the risk associated with the tax shield (resulting from interest paid on outstanding debt)is the same as that associated with the firm.

Accepted Answer

A) True 
 B)False

Question 9

The estimation of present value using the constant growth model involves the calculation of a terminal value.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  Discounts free cash flow to the firm by the cost of equity 
B)  Discounts free cash flow to the firm by the weighted average cost of capital 
C)  Discounts free cash flow to equity 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 cost of equity 
B)  Discounts free cash flow to the firm by the weighted average cost of capital 
C)  Discounts free cash flow to equity 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

It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firm's outstanding shares.

Accepted Answer

A) True 
 B)False

Question 12

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 13

The variable growth model would be most appropriate for valuing firms in the growth phase of their product life cycle.

Accepted Answer

A) True 
 B)False

Question 14

The incremental cash flows of a merger can relate to which of the following:

Accepted Answer

A)  Working capital 
B)  Profits 
C)  Capital spending 
D)  Income taxes 
E)  All of the above 
A)  Working capital 
B)  Profits 
C)  Capital spending 
D)  Income taxes 
E)  All of the above

Question 15

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 16

The cost of equity can also be viewed as an opportunity cost.

Accepted Answer

A) True 
 B)False

Question 17

For non-rated firms,the analyst may estimate the pretax cost of debt for an individual firm by comparing debt-to-equity or total capital ratios,interest coverage ratios,and operating margins with those of similar rated firms.

Accepted Answer

A) True 
 B)False

Question 18

Intuition suggests that the length of the high-growth period when applying the variable growth model should be shorter the greater the current growth rate of the firm's cash flow.

Accepted Answer

A) True 
 B)False

Question 19

The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk.

Accepted Answer

A) True 
 B)False

Question 20

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

According to the capital asset pricing model,risk consists of both diversifiable and non-diversifiable components.

The enterprise or free cash flow to the firm approach to valuation discounts the after-tax free cash flow available to the firm from operations at the weighted average cost of capital to obtain the enterprise value.

Which one of the following factors is not considered in calculating the firm's cost of equity?

Free cash flow to the firm is also called enterprise cash flow.

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

Which one of the following factors is not considered in calculating the firm's cost of capital?

The calculation of free cash flow to the firm includes all of the following except for

The estimation of present value using the constant growth model involves the calculation of a terminal value.

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

It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firm's outstanding shares.

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

The variable growth model would be most appropriate for valuing firms in the growth phase of their product life cycle.

The incremental cash flows of a merger can relate to which of the following:

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

The cost of equity can also be viewed as an opportunity cost.

For non-rated firms,the analyst may estimate the pretax cost of debt for an individual firm by comparing debt-to-equity or total capital ratios,interest coverage ratios,and operating margins with those of similar rated firms.

Intuition suggests that the length of the high-growth period when applying the variable growth model should be shorter the greater the current growth rate of the firm's cash flow.

The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk.

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.

Introduction to Mergers, acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

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

Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Postclosing Integration: Mergers, acquisitions, and Business Alliances

Relative,asset-Oriented,and Real Option Valuation Basics

Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions

Analysis and Valuation of Privately Held Companies

Structuring the Deal: Payment and Legal Considerations

Structuring the Deal: Tax and Accounting Considerations

Financing the Deal: Private Equity, hedge Funds, and Other Sources of Funds

Highly Leveraged Transactions: Lbo Valuation and Modeling Basics

Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs

Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Cross-Border Mergers and Acquisitions: Analysis and Valuation

Filters

Exam 7: Merger and Acquisition Cash Flow Valuation Basics

According to the capital asset pricing model,risk consists of both diversifiable and non-diversifiable components.

The enterprise or free cash flow to the firm approach to valuation discounts the after-tax free cash flow available to the firm from operations at the weighted average cost of capital to obtain the enterprise value.

Which one of the following factors is not considered in calculating the firm's cost of equity?

Free cash flow to the firm is also called enterprise cash flow.

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

Which one of the following factors is not considered in calculating the firm's cost of capital?

The calculation of free cash flow to the firm includes all of the following except for

The estimation of present value using the constant growth model involves the calculation of a terminal value.

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

It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firm's outstanding shares.

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

The variable growth model would be most appropriate for valuing firms in the growth phase of their product life cycle.

The incremental cash flows of a merger can relate to which of the following:

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

The cost of equity can also be viewed as an opportunity cost.

For non-rated firms,the analyst may estimate the pretax cost of debt for an individual firm by comparing debt-to-equity or total capital ratios,interest coverage ratios,and operating margins with those of similar rated firms.

Intuition suggests that the length of the high-growth period when applying the variable growth model should be shorter the greater the current growth rate of the firm's cash flow.

The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk.

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.

Introduction to Mergers, acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

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

Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Postclosing Integration: Mergers, acquisitions, and Business Alliances

Relative,asset-Oriented,and Real Option Valuation Basics

Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions

Analysis and Valuation of Privately Held Companies

Structuring the Deal: Payment and Legal Considerations

Structuring the Deal: Tax and Accounting Considerations

Financing the Deal: Private Equity, hedge Funds, and Other Sources of Funds

Highly Leveraged Transactions: Lbo Valuation and Modeling Basics

Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs

Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Cross-Border Mergers and Acquisitions: Analysis and Valuation

Filters