Question 1

All of
the following are steps in the analysis and valuation framework used to
understand the fundamentals of a business and determine estimates of its
value except:

a.

Analyze the firm’s
strategy in terms of the competition.

b.

Assess the quality
of the firm’s accounting and financial reporting.

c.

Derive forecasts of
future earnings from the firm’s projected financial statements.

d.

Obtain the national
ranking of the firm’s external auditors. 
1.2 points   

Question 2

Clean
surplus accounting for most common stock transactions holds for shares
accounted for at market value. An exception to this is:

a.

issuance of common
equity shares for employee stock options exercises

b.

repurchase of common
shares

c.

issuance of common shares
to new shareholders in public exchanges

d.

none of these.
1.2 points   

Question 3

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

a.

some firms do not
pay a regular periodic dividend

b.

dividends represent
a transfer of wealth to shareholders

c.

dividends are
arbitrarily established

d.

it is a challenge to
forecast the final liquidating dividend
1.2 points   

Question 4

Which of
the following would likely be the most useful when valuing a dot.com company?

a.

Price-earnings

b.

Net asset value

c.

Dividend yield

d.

Discounted cash flow
1.2 points   

Question 5

In
theory, all three valuation models, when correctly implemented with internally
consistent assumptions, will produce the same estimates of value. 
However, in practice, which of the following errors can result in different
value estimates? 

a.

incomplete or
inconsistent earnings and cash flow forecasts.

b.

inconsistent
estimates of weighted average costs of capital.

c.

incorrect continuing
value computations.

d.

All of these errors
result in different value estimates.
1.2 points   

Question 6

At the beginning of 2012 investors had invested $25,000
of common equity in Grant Corp.and expect to earn a return of 11% per year. In
addition, investors expect Grant Corp. to pay out 100% of income in dividends
each year. Forecasts of Grant’s net income are as follows:
            2012
– $3,500
            2013
– $3,200
            2014
– $2,900
            2015
and beyond – $2,750
Using this information what is Grant’s residual income valuation at the
beginning of 2012?

a.

$26,151

b.

$26,041

c.

$25,000

d.

$26,350
1.2 points   

Question 7

In some
industries, competitive dynamics eventually drive long-run projections of the
future returns earned by the firm to an equilibrium level equal to the long-run
expected cost of equity capital in the firm. At that point, a firm can be
expected to earn ____________ residual income in the future.

a.

decreasing.

b.

increasing.

c.

zero.

d.

There is not enough
information to answer this question.
1.2 points   

Question 8

Early in
a period in which sales were increasing at a modest rate and plan expansion and
start-up costs were occurring at a rapid rate, a successful business would
likely experience

a.

Increased profits
and no change in financing requirements.

b.

Decreased profits
and increased financing requirements because of an increasing cash shortage.

c.

Decreased profits
and decreased financing requirements because of an increasing cash surplus.

d.

Increased profits
and increased financing requirements because of an increasing cash shortage.
1.2 points   

Question 9

If an
analyst expects a firm to generate net income each period exactly equal to
required earnings, then the value of the firm will be

a.

less than the book
value of common shareholders’ equity.

b.

greater than the
book value of common shareholders’ equity.

c.

exactly equal to the
book value of common shareholders’ equity.

d.

exactly equal to
working capital.
1.2 points   

Question 10

Zonk
Corp.
The following data pertains to Zonk Corp., a manufacturer of ball bearings
(dollar amounts in millions):
Total assets

$6,840

Interest-bearing
debt

$3,562

Average pre-tax
borrowing cost

11.5%

Common equity:

 

     Book value

$2,560

     Market value

$12,850

Income tax rate

35%

Market equity beta

1.24

Using the above information, calculate Zonk’s weighted-average cost
of capital:

a.

11.89%

b.

10.90%

c.

11.5%

d.

7.48%
1.2 points   

Question 11

Residual
income is

a.

the difference
between the net income the analyst expects the firm to generate and the
required earnings of the firm.

b.

adjusted net income
the firm reports.

c.

the difference
between the net income the analyst expects the firm to generate and the
reported earnings of the firm.

d.

the book value of
common equity capital at the beginning of the period multiplied by the
required rate of return on common equity capital.
1.2 points   

Question 12

Jarrett
Corp.
At the end of 2010 Jarrett Corp. developed the following forecasts of net
income:
 

Forecasted

Year

Net Income

2011

$20,856

2012

$22,733

2013

$24,552

2014

$27,252

2015

$29,978

Management believes that after 2015 Jarrett will grow at a rate of 7% each
year. Total common shareholders’ was $112,768 on December 31, 2010. Jarrett
has notestablished a dividend and does not plan to paying dividends
during 2011 to 2015. Its cost of equity capital is 12%.
What would be Jarrett’s common shareholders’ equity at the end
of 2014?

a.

$95,540

b.

$180,909

c.

$208,161

d.

$112,768
1.2 points   

Question 13

At the beginning of 2012 investors had invested $125,000
of common equity in Jan Corp.and expect to earn a return of 15% per year. In
addition, investors expect Jan Corp. to pay out 100% of income in dividends
each year. Forecasts of Jan’s net income are as follows:
            2012
– $41,000
            2013
– $35,400
            2014
– $33,200
            2015
and beyond – $25,000
Using this information what is Jan’s residual income valuation at the beginning
of 2012?

a.

$190,262

b.

$260,415

c.

$184,600

d.

$125,000
1.2 points   

Question 14

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.

temporary deviations
of price from value occur

b.

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

c.

share prices in the
capital markets generally correlate closely with share value

d.

share prices do not
always equal share values
1.2 points   

Question 15

Zonk
Corp.
The following data pertains to Zonk Corp., a manufacturer of ball bearings
(dollar amounts in millions):
Total assets

$6,840

Interest-bearing
debt

$3,562

Average pre-tax
borrowing cost

11.5%

Common equity:

 

     Book value

$2,560

     Market value

$12,850

Income tax rate

35%

Market equity beta

1.24

Determine the weight on debt capital that should be used to calculate Zonk’s
weighted-average cost of capital:

a.

78.3%

b.

58.2%

c.

50%

d.

21.7%
1.2 points   

Question 16

Assume
that a firm’s book value at the beginning of the year is $17,800 and that the
firm reports net income of $6,200. If the firm’s book value at the end of the
year is $20,000 what was the amount of dividends paid during the year?

a.

$4,000

b.

$8,800

c.

Insufficient
information to determine

d.

$2,200
1.2 points   

Question 17

Dirty
surplus items in U.S. GAAP typically arise from all of the following except:

a.

realized gains

b.

interest rates

c.

foreign currency
exchange rates

d.

changes in
investment security fair values
1.2 points   

Question 18

Firm-specific factors that increase the firm’s
nondiversifiable risk include all of the following except:

a.

exposure to interest rate changes

b.

exposure to
management competence

c.

exposure to cyclicality

d.

exposure to
inflation
1.2 points   

Question 19

Assume
that a firm had shareholders’ equity on the balance sheet at a book value of
$1,600 at the end of 2010. During 2011 the firm earns net income of $1,300,
pays dividends to shareholders of $600, and uses $300 to repurchase common
shares. The book value of shareholders equity at the end of 2011 is:

a.

$2,600

b.

$3,800

c.

$400

d.

$2,000
1.2 points   

Question 20

Under the
cash-flow-based valuation approach, free cash flows can be used instead of
dividends as the expected future payoffs to the investor in the numerator of
the general valuation model because:

a.

over the life of the
firm, the free cash flows out of the firm for investments and cash flows paid
into the firm in dividends from these investments will be equivalent.

b.

this approach
focuses on wealth distribution to shareholders.

c.

this approach focuses
on earnings as a measure of the capital that a firm creates.

d.

over the life of the
firm, the free cash flows into the firm and cash flows paid out of the firm
in dividends to shareholders will be equivalent.
1.2 points   

Question 21

Jarrett
Corp.
At the end of 2010 Jarrett Corp. developed the following forecasts of net
income:
 

Forecasted

Year

Net Income

2011

$20,856

2012

$22,733

2013

$24,552

2014

$27,252

2015

$29,978

Management believes that after 2015 Jarrett will grow at a rate of 7% each
year. Total common shareholders’ was $112,768 on December 31, 2010. Jarrett
has notestablished a dividend and does not plan to paying dividends
during 2011 to 2015. Its cost of equity capital is 12%.
Compute the value of Jarrett Corp. on January 1, 2011, using the
residual income valuation model. Use the half-year adjustment.

a.

$112,768

b.

$185,329

c.

$195,540

d.

$133,624
1.2 points   

Question 22

One
rationale for using expected dividends in valuation is

a.

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

b.

Dividend payout
ratios are set based on profitability.

c.

Dividends are a
necessary payment in order for a firm to have value.

d.

Dividends are the
most reliable measure of value because most companies payout dividends to
shareholders.
1.2 points   

Question 23

Zonk
Corp.
The following data pertains to Zonk Corp., a manufacturer of ball bearings
(dollar amounts in millions):
Total assets

$6,840

Interest-bearing
debt

$3,562

Average pre-tax
borrowing cost

11.5%

Common equity:

 

     Book value

$2,560

     Market value

$12,850

Income tax rate

35%

Market equity beta

1.24

Assuming that riskless rate is 4.2% and the market premium is 6.2%
calculate Zonk’s cost of equity capital:

a.

10.4%

b.

2.0%

c.

11.89%

d.

7.69%
1.2 points   

Question 24

Required
earnings are the

a.

net income the
analyst expects the firm to generate multiplied by the required rate of
return on common equity capital.

b.

the market value of
common equity capital at the beginning of the period multiplied by the
required rate of return on common equity capital.

c.

the book value of
common equity capital at the beginning of the period multiplied by the
required rate of return on common equity capital.

d.

adjusted net income
multiplied by the required rate of return on common equity capital.
1.2 points   

Question 25

Jarrett
Corp.
At the end of 2010 Jarrett Corp. developed the following forecasts of net
income:
 

Forecasted

Year

Net Income

2011

$20,856

2012

$22,733

2013

$24,552

2014

$27,252

2015

$29,978

Management believes that after 2015 Jarrett will grow at a rate of 7% each
year. Total common shareholders’ was $112,768 on December 31, 2010. Jarrett
has notestablished a dividend and does not plan to paying dividends
during 2011 to 2015. Its cost of equity capital is 12%.
What would be Jarrett’s residual income in 2013?

a.

$5,200

b.

$5,789

c.

$24,552

d.

$18,763

 
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