Chapter 10

Which type of equity valuation model is most likely to be preferable when one is comparing similar companies? A. A multiplier model B. A present value model C. An asset based valuation model

A. A multiplier model

The primary difference between P/E multiples based on comparables and P/E multiples based on fundamentals is that fundamentals-based P/Es take into account: A. Future expectations B. The law of one price C. Historical information

A. Future expectations

An equity analyst has been asked to estimate the intrinsic value of the common stock of Omega Corporation, a leading manufacturer of automobile seats. Omega is in a mature industry, and both its earnings and dividends are expected to grow at a rate of 3 percent annually. Which of the following is most likely to be the best model for determining the intrinsic value of an Omega share? A. Gordon growth model B. Free cash flow to equity model C. Multistage dividend discount model

A. Gordon growth model

An analyst makes the following statement: "Use of P/E and other multiples for analysis is not effective because the multiples are based on historical data and because not all companies have positive accounting earnings." The analyst's statement is most likely: A. Inaccurate with respect to both historical data and earnings. B. Accurate with respect to historical data and inaccurate with respect to earnings. C. Inaccurate with respect to historical data and accurate with respect to earnings.

A. Inaccurate with respect to both historical data and earnings.

Which of the following statements regarding the calculation of the enterprise value multiple is most likely correct? A. Operating income may be used instead of EBITDA B. EBITDA may not be used if company earnings are negative C. Book value of debt may be used instead of market value of debt

A. Operating income may be used instead of EBITDA

An analyst estimates the intrinsic value of a stock to be in the range of $17.85 to $21.45. The current market price of the stock is $24.35. This stock is most likely: A. Overvalued B. Undervalued C. Fairly Valued

A. Overvalued

Which of the following is most likely a reason for using asset-based valuation? A. The analyst is valuing a privately held company B. The company has a relatively high level of intangible assets C. the market values of assets and liabilities are different from the balance sheet values

A. The analyst is valuing a privately held company

In the free cash flow to equity (FCFE) model, the intrinsic value of a share of stock is calculated as: A. The present value of future expected FCFE B. The present value of future expected FCFE plus net borrowing C. The present value of future expected FCFE minus fixed capital investment

A. The present value of future expected FCFE

An analyst determines the intrinsic value of an equity security to be equal to $55. If the current price is $47, the equity is most likely: A. Undervalued B. Fairly valued C. Overvalued

A. Undervalued

An analyst is attempting to calculate the intrinsic value of a company and has gathered the following company data: EBTDA, total market value, and market value of cash and short-term investments, liabilities, and preferred shares. The analyst is least likely to use: A. A multiplier model B. A discounted cash flow model C. An asset-based valuation

B. A discounted cash flow model

An analyst who based the calculation of intrinsic value on dividend-paying capacity rather than expected dividends will most likely use the: A.Dividend discount model B. Free Cash flow to equity model C. Cash flow from operations model

B. Free cash flow to equity model

The Gordon growth model can be used to value dividend-paying companies that are: A. Expected to grow very fast B. In a mature phase of growth C. Very sensitive to the business cycle

B. In a mature phase of growth

Asset-based valuation models are best suited to companies where the capital structure does not have a high proportion of: A. Debt B. Intangible assets C. Current assets and liabilities

B. Intangible assets

A disadvantage of the EV method for valuing equity is that the following information may be difficult to obtain: A. Operating income B. Market value of debt C. Market value of equity

B. Market value of debt

Enterprise value is most often determined as market capitalization of common equity and preferred stock minus the value of cash equivalents plus the: A. Book value of debt B. Market value of debt C. Market value of long-term debt

B. Market value of debt

Two analysts estimating the value of a non-convertible, non-callable, perpetual preferred stock with a constant dividend arrive at different estimated values. The most likely reason for the difference is that the analysts used different: A. Time horizons B. Required rates of return C. Estimated dividend growth rates

B. Required rates or return

Which of the following is most likely considered a weakness of present value model? A. Present value models cannot be used for companies that do not pay dividends B. Small changes in model assumptions and inputs can result in large changes in the computed intrinsic value of the security C. The value of the security depends on the investor's holding period; thus, comparing valuations of different companies for different investors is difficult

B. Small changes in model assumptions and inputs can result in large changes in the computed intrinsic value of the security

Book value is least likely to be considered when using: A. A multiplier model B. An asset-based valuation model C. A present value model

C. A present value model

In asset-based valuation models, the intrinsic value of a common share of stock is based on the: A. Estimated market value of the company's assets B. Estimated market value of the company's assets plus liabilities C. Estimated market value of a company's assets minus liabilities

C. Estimated market value of a company's assets minus liabilities

Which of the following is most likely used in a present value model? A. Enterprise value B. price to free cash flow C. Free cash flow to equity

C. Free cash flow to equity

An investor expects to purchase shares of common stock today and sell them after two years. The investor has estimated dividends for the next two years, D1 and D2, and the selling price of the stock two years from now, P2. According to the dividend discount model, the intrinsic value of the stock today is the present value of: A. Next year's dividend, D2 B. Future expected dividend, D1 and D2 C. Future expected dividends and Price, D1,D2, and P2

C. Future expected dividends and Price, D1,D2, and P2

The market value of equity for a company can be calculated as enterprise value multiple is most likely correct? A. Minus market value of debt, preferred stock and short-term investments B. Plus market value of debt and preferred stock minus short-term investments C. Minus market value of debt and preferred stock plus short-term investments

C. Minus market value of debt and preferred stock plus short-term investments

With respect to present value models, which of the following statements is most accurate? A. Present value models can be used only if a stock pays dividends B. Present value models can be used only if a stock pays a dividend or s expected to pay a dividend C. Present value models can be used for stocks that currently pay a dividend, are expected to pay a dividend, or are not expected to pay a dividend

C. Present value models can be used for stocks that currently pay a dividend, are expected to pay a dividend, or are not expected to pay a dividend

A price earnings ratio that is derived from the Gordon growth model is inversely related to the: A. Growth Rate B. Dividend payout ratio C. Required rate of return

C. Required rate of return

The best model to use when valuing a young dividend-paying company that is just entering the growth phase is most likely the: A. Gordon growth model B. Two-stage dividend discount model C. Three-stage dividend discount model

C. Three-stage dividend discount model