Question 1

Zonk Corp.
The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
 Assuming that riskless rate is 4.6% and the market premium is 7.3%, calculate Zonk 's cost of equity capital:

Accepted Answer

A)   10.4%
B)   7.69%
C)   11.89%
D)   8.28% D

Question 2

In theory, the value of a share of common equity is the present value of ____________________________________________________________.

Accepted Answer

the expected future dividends

Question 3

One rationale for using expected dividends in valuation is:

Accepted Answer

A)   Dividends are a necessary payment in order for a firm to have value.
B)   Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C)   Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D)   Dividend payout ratios are set based on profitability. B

Question 4

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b _j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?

Accepted Answer

The answer of The CAPM computes expected rates of return...

Question 5

Determine the weight on equity capital that should be used to calculate Zonk 's weighted-average cost of capital:

Accepted Answer

A)   79.00%
B)   78.3%
C)   41.8%
D)   50%

Question 6

Using the above information, calculate Zonk 's weighted-average cost of capital:

Accepted Answer

A)   11.5%
B)   7.97%
C)   7.48%
D)   10.90%

Question 7

Returns on systematic risk-free securities (like U.S. Treasury securities) should exhibit what type of correlation with returns on a diversified market wide portfolio of stocks?

Accepted Answer

A)   Nearly perfect correlation
B)   Perfect correlation
C)   No correlation
D)   Unable to tell without specifics about the portfolio

Question 8

All of the following are steps in the analysis and valuation framework used to understand the fundamentals of a business and determine estimates of its value except :

Accepted Answer

A)   Analyze the firm's strategy in terms of the competition.
B)   Assess the quality of the firm's accounting and financial reporting.
C)   Derive forecasts of future earnings from the firm's projected financial statements.
D)   Obtain the national ranking of the firm's external auditors.

Question 9

The dividends valuation approach measures value-relevant dividends to encompass various transactions between the firm and the common shareholders. What transactions should the analyst include in value-relevant dividends for purposes of implementing the dividends valuation model? Why?

Accepted Answer

The answer of The dividends valuation approach measures value-relevant dividends...

Question 10

According to the text, dividends are value-relevant even though the firm's dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Accepted Answer

The answer of According to the text, dividends are value-relevant...

Question 11

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Accepted Answer

The answer of Explain the theory behind the dividends valuation...

Question 12

Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except :

Accepted Answer

A)   Exposure to interest rate changes
B)   Exposure to inflation
C)   Exposure to management competence
D)   Exposure to cyclicality

Question 13

If dividend projections include the effect of inflation, then the discount rate used should be a(n) ____________________ rate.

Accepted Answer

The answer of If dividend projections include the effect of...

Question 14

Which of the following is not a problem with using a dividend-based valuation formula?

Accepted Answer

A)   Dividends are arbitrarily established.
B)   Dividends represent a transfer of wealth to shareholders.
C)   Some firms do not pay a regular periodic dividend.
D)   It is a challenge to forecast the final liquidating dividend.

Question 15

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

Accepted Answer

The answer of Dividends measure the cash that ____________________ ultimately...

Question 16

When deriving the equity value of a firm, an analyst forecasts the real dividends expected to be paid in the future. In this case, which discount rate should be used?

Accepted Answer

A)   The nominal rate of return
B)   The real rate of return
C)   The risk-free rate of return
D)   The risk adjusted rate of return

Question 17

Determine the weight on debt capital that should be used to calculate Zonk 's weighted-average cost of capital:

Accepted Answer

A)   21.7%
B)   21.00%
C)   50%
D)   58.2%

Question 18

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

Accepted Answer

The answer of Normally, valuation methods are designed to produce...

Question 19

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Accepted Answer

The answer of Explain why analysts and investors use risk-adjusted...

Question 20

Bridgetron
An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information:
  
An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

Accepted Answer

The answer of Bridgetron
An analyst wants to value the sum...

Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions) : Assuming that riskless rate is 4.6% and the market premium is 7.3%, calculate Zonk 's cost of equity capital:

In theory, the value of a share of common equity is the present value of ____________________________________________________________.

One rationale for using expected dividends in valuation is:

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b _j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?

Determine the weight on equity capital that should be used to calculate Zonk 's weighted-average cost of capital:

Using the above information, calculate Zonk 's weighted-average cost of capital:

Returns on systematic risk-free securities (like U.S. Treasury securities) should exhibit what type of correlation with returns on a diversified market wide portfolio of stocks?

All of the following are steps in the analysis and valuation framework used to understand the fundamentals of a business and determine estimates of its value except :

The dividends valuation approach measures value-relevant dividends to encompass various transactions between the firm and the common shareholders. What transactions should the analyst include in value-relevant dividends for purposes of implementing the dividends valuation model? Why?

According to the text, dividends are value-relevant even though the firm's dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except :

If dividend projections include the effect of inflation, then the discount rate used should be a(n) ____________________ rate.

Which of the following is not a problem with using a dividend-based valuation formula?

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

When deriving the equity value of a firm, an analyst forecasts the real dividends expected to be paid in the future. In this case, which discount rate should be used?

Determine the weight on debt capital that should be used to calculate Zonk 's weighted-average cost of capital:

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions) : Assuming that riskless rate is 4.6% and the market premium is 7.3%, calculate Zonk 's cost of equity capital:

In theory, the value of a share of common equity is the present value of ____________________________________________________________.

One rationale for using expected dividends in valuation is:

The CAPM computes expected rates of return on common equity capital using the following model: E[REj] = E[RF] + b j x {E[RM] - E[RF]} What are the roles of each of the three components of this model?

Determine the weight on equity capital that should be used to calculate Zonk 's weighted-average cost of capital:

Using the above information, calculate Zonk 's weighted-average cost of capital:

Returns on systematic risk-free securities (like U.S. Treasury securities) should exhibit what type of correlation with returns on a diversified market wide portfolio of stocks?

All of the following are steps in the analysis and valuation framework used to understand the fundamentals of a business and determine estimates of its value except :

The dividends valuation approach measures value-relevant dividends to encompass various transactions between the firm and the common shareholders. What transactions should the analyst include in value-relevant dividends for purposes of implementing the dividends valuation model? Why?

According to the text, dividends are value-relevant even though the firm's dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except :

If dividend projections include the effect of inflation, then the discount rate used should be a(n) ____________________ rate.

Which of the following is not a problem with using a dividend-based valuation formula?

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

When deriving the equity value of a firm, an analyst forecasts the real dividends expected to be paid in the future. In this case, which discount rate should be used?

Determine the weight on debt capital that should be used to calculate Zonk 's weighted-average cost of capital:

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b _j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?