finc 420 exam 3 conceptual questions

Unexpected changes in earnings, dividends, and cash flows do not correlate closely with changes in stock prices

Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except

capital expenditures and dividends.

Free cash flow is calculated as net cash provided by operating activities less

required return on equity capital

If an analyst wants to value a potential investment in the common stock equity of a firm, the analyst should discount the projected free cash flows at the

Capital expenditures, free cash flow

Net cash flow from operations - (_______________) -dividends = (________________)

Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.

One rationale for using expected dividends in valuation is

TRUE

TRUE/FALSE: If a firm is privately owned, and its stock is not traded in public markets, then we cannot measure its beta for use in the CAPM model, we cannot observe its stock price for use in the DCF model, and we don't know what the risk premium is for use in the bond-yield-plus-risk-premium method. All this makes it especially difficult to estimate the cost of equity for a private company.

FALSE

TRUE/FALSE: Suppose the debt ratio (D/TA) is 50%, the interest rate on new debt is 8%, the current cost of equity is 16%, and the tax rate is 40%. An increase in the debt ratio to 60% would decrease the weighted average cost of capital (WACC).

1. The expected future free cash flows over the forecast horizon. 2. The expected future free cash flows at the final period of the forecast horizon. 3. The discount rate used to compute the present value of the future free cash flows.

What three elements are needed to value a resource when using cash flows?

B. Dividends represent a transfer of wealth to shareholders

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

A. The free cash flow valuation model discounts free cash flows by the required return on equity.

Which of the following statements is NOT CORRECT? a. The free cash flow valuation model discounts free cash flows by the required return on equity. b. The free cash flow valuation model can be used to find the value of a division. c. An important step in applying the free cash flow valuation model is forecasting the firm's pro forma financial statements. d. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. e. The free cash flow valuation model can be used both for companies that pay dividends and those that do not pay dividends.

Market beta

________________ is an estimate of systematic risk based on the degree of covariation between a firm's stock returns and an index of stock returns for all firms in the market