INV3701
Investments: Equity Asset Valuation
Assignment Solutions: Assignment 1
SEMESTER 2
ASSIGNMENT 01 Due date: 17 August 2022
Unique number: 763397
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation:
application and process, equity return concepts, the dividend discount model and free cash
flow models. Refer to lessons 1 to 4, which include chapters 1, 3 to 5 and, 7 to 8 in the
prescribed book.
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
The following assignment contains 20 multiple-choice questions. [20 marks]
Questions
1. Which one of the following is most likely correct about alpha?
A Alpha is the excess risk adjusted return.
B An analyst will only make a profit when alpha is positive.
C Alpha is the difference between market return and the firm's specific return.
An excess risk - adjustment return is also called an abnormal return or alpha.
Alpha = expected return - Required return
For an active investment manager, valuation is an inherent part of the attempt to produce
investment returns that exceed the returns commensurate with the investment’s risk; that is,
positive excess risk-adjusted returns.
, 2. An appropriate valuation approach for a company that is going out of business would be
to calculate its…….
A. Residual income value
B. Liquidation value
C. Dividend discount model
Absolute equity valuation models are present value models. These models specify the intrinsic
value of an asset. Dividend discount valuation models; Residual income model; FCFF and FCFE
are all absolute valuation models.
Relative valuation models estimate an asset’s value relative to that of another asset. The idea is
that similar assets should sell at similar prices, and typically implemented using price multiples
(P/E, P/B, P/S)
3. Which one of the following statements is most likely correct with regard to steps and
activities/actions in the equity valuation process?
A. An analyst applies the valuation conclusions by choosing the FCFE model.
B. To convert his forecast into a valuation, an analyst does not carry out a sensitivity
analysis.
C. To understand the business, an analyst and his assistant conduct a ratio analysis
as part of their overall financial statements.
To convert forecast into valuation, analysts use sensitivity analysis
Sensitivity analysis is an analysis to determine how changes in an assumed input would affect
the outcome.
For example, a sensitivity analysis can be used to assess how a change in assumptions about
a company’s future growth—for example, decomposed by sales growth forecasts and margin
forecasts—and/or a change in discount rates would affect the estimated value.
Investments: Equity Asset Valuation
Assignment Solutions: Assignment 1
SEMESTER 2
ASSIGNMENT 01 Due date: 17 August 2022
Unique number: 763397
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation:
application and process, equity return concepts, the dividend discount model and free cash
flow models. Refer to lessons 1 to 4, which include chapters 1, 3 to 5 and, 7 to 8 in the
prescribed book.
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
The following assignment contains 20 multiple-choice questions. [20 marks]
Questions
1. Which one of the following is most likely correct about alpha?
A Alpha is the excess risk adjusted return.
B An analyst will only make a profit when alpha is positive.
C Alpha is the difference between market return and the firm's specific return.
An excess risk - adjustment return is also called an abnormal return or alpha.
Alpha = expected return - Required return
For an active investment manager, valuation is an inherent part of the attempt to produce
investment returns that exceed the returns commensurate with the investment’s risk; that is,
positive excess risk-adjusted returns.
, 2. An appropriate valuation approach for a company that is going out of business would be
to calculate its…….
A. Residual income value
B. Liquidation value
C. Dividend discount model
Absolute equity valuation models are present value models. These models specify the intrinsic
value of an asset. Dividend discount valuation models; Residual income model; FCFF and FCFE
are all absolute valuation models.
Relative valuation models estimate an asset’s value relative to that of another asset. The idea is
that similar assets should sell at similar prices, and typically implemented using price multiples
(P/E, P/B, P/S)
3. Which one of the following statements is most likely correct with regard to steps and
activities/actions in the equity valuation process?
A. An analyst applies the valuation conclusions by choosing the FCFE model.
B. To convert his forecast into a valuation, an analyst does not carry out a sensitivity
analysis.
C. To understand the business, an analyst and his assistant conduct a ratio analysis
as part of their overall financial statements.
To convert forecast into valuation, analysts use sensitivity analysis
Sensitivity analysis is an analysis to determine how changes in an assumed input would affect
the outcome.
For example, a sensitivity analysis can be used to assess how a change in assumptions about
a company’s future growth—for example, decomposed by sales growth forecasts and margin
forecasts—and/or a change in discount rates would affect the estimated value.
