FIN 480 Exam 2 Conceptual

Explain the difference between maximum dividend method, the pseudo method, and the delayed dividend method.

1. The maximum dividend method = adjusting financial statements 2. The delayed dividend method = paying out dividends in year 5 from a large cumulative cash balance then adjusting the financial statements 3. The pseudo dividend method = do not adjust financial statements

What are the pros and cons of using the dividend growth method and the market ratio method when calculating the continuing value of a firm?

Dividend growth: a pro of this method is that there is no need for a comparable firm but a con is the use of "g" which has a substantial impact on results Industry ratio: a pro of the industry ratio is that is uses real data but a con is there are no good comparable firm

What are the pros and cons of using the RADR and CEQ methods to discount cash flows?

RADR: a pro of RADR is it uses actual market data for discount rates but a con is that this discount rate is not higher in riskier years CEQ: a pro of CEQ is that the discount rate adjusts for riskier years but a con is this method uses an assumptive firm-to-market rate of 20% which may not be right

What is the difference between the explicit and the continuing periods?

The explicit period is the forecasted period (ex. years 1-5) and the continuing period is all periods after the forecasted periods (ex. year 6 and beyond)

What is the V/C method actually?

This method just uses the discounted cash flows method with a high arbitrary discount rate [ex. 100K/(1.4)^2] - the .4 represents a 40% discount rate