FIN 420 EXAM 3 CH 14 18 CAPITAL
STRUCTURE THEORY LEVERAGE POLICY
VALUATION STRATEGY QUESTIONS AND
SOLUTIONS
●● Equity-based valuation models are based on all metrics except
a.
dividends
b.
cash flow
c.
working capital
d.
earnings
Answer: c. working capital
●● One rationale for using expected dividends in valuation is
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.
Answer: b.
Dividends are paid in cash, and cash serves as a measurable common
denominator for comparing the future benefits of alternative investment
opportunities.
●● 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?
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
, Answer: b.
The real rate of return
●● 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:
a.
share prices in the capital markets generally correlate closely with share
value
b.
share prices do not always equal share values
c.
temporary deviations of price from value occur
d.
unexpected changes in earnings, dividends, and cash flows do not
correlate closely
with changes in stock prices
Answer: d.
unexpected changes in earnings, dividends, and cash flows do not
correlate closely
with changes in stock prices
STRUCTURE THEORY LEVERAGE POLICY
VALUATION STRATEGY QUESTIONS AND
SOLUTIONS
●● Equity-based valuation models are based on all metrics except
a.
dividends
b.
cash flow
c.
working capital
d.
earnings
Answer: c. working capital
●● One rationale for using expected dividends in valuation is
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.
Answer: b.
Dividends are paid in cash, and cash serves as a measurable common
denominator for comparing the future benefits of alternative investment
opportunities.
●● 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?
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
, Answer: b.
The real rate of return
●● 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:
a.
share prices in the capital markets generally correlate closely with share
value
b.
share prices do not always equal share values
c.
temporary deviations of price from value occur
d.
unexpected changes in earnings, dividends, and cash flows do not
correlate closely
with changes in stock prices
Answer: d.
unexpected changes in earnings, dividends, and cash flows do not
correlate closely
with changes in stock prices
