Question 1

Bridgetron
An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information:
 $\begin{array}{llcc}
  \text { Total assets } &\$25,675  \
 \text {Interest-Bearing Debt } &\$18,525\
 \text { Average pre-tax borrowing cost } &9.25\%\
 \text {Common equity.  } &\
 \text { Book value } &\$8,950\
 \text { Market value } &\$34,956\
 \text {  Income tax Rate} &35\%\
 \text {  Market Equity Beta}&1.05 \
\text { Risk-free Rate }&3.8\%\
 \text {Market Premium  } &5.7\%
\end{array}$

An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

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An analyst wants to value the sum...

Question 2

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

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Question 3

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

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Question 4

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

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Question 5

Provide the rationale for using expected dividends in a valuation model.

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Question 6

Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements. What are the three elements that the analyst needs to measure?

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Question 7

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

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Question 8

One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.

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Question 9

Because the market equity beta reflects the level of operating leverage, financial leverage, variability of sales, and other characteristics of a firm, there are situations where an analyst might have to adjust the beta because of changes in the capital structure. A situation that might require an analyst to estimate a new levered beta is a ___________________________________.

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Question 10

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

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Question 11

Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.

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Question 12

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equityholders in order to value the firm?

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Question 13

If dividend projections include the effect of inflation, then the discount rate used should be a ____________________ rate.

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Question 14

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

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Question 15

Why are dividends value-relevant to common equity shareholders?

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Question 16

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

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Question 17

Identify the types of firm-specific factors that increase a firm's nondiversifiable risk (systematic risk). Identify the types of firm-specific factors that increase a firm's diversifiable
risk (idiosyncratic risk or nonsystematic risk). Why do models of risk-adjusted expected
returns include no expected return premia for diversifiable risk?

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Question 18

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b_j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?

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Question 19

In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a ________________________________________.

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Question 20

Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable, financially healthy, profitable, tax-paying firm that has been
financed with all equity and no debt decides to add a reasonable amount of debt to its capital
structure. What effect will that change in capital structure likely have on the firm's
weighted average cost of capital?

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Quiz 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

Provide the rationale for using expected dividends in a valuation model.

Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements. What are the three elements that the analyst needs to measure?

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

One criticism in using the CAPM to calculate the cost of equity capital is that and the ____________________ are quite sensitive to the time period and methodology used in their computation.

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equityholders in order to value the firm?

If dividend projections include the effect of inflation, then the discount rate used should be a ____________________ rate.

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

Why are dividends value-relevant to common equity shareholders?

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b_j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?

In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a ________________________________________.

Quiz 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Explain the theory behind the dividends valuation approach. Why are dividends value-relevant to common equity shareholders?

Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

Provide the rationale for using expected dividends in a valuation model.

Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements. What are the three elements that the analyst needs to measure?

Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.

One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.

Explain why analysts and investors use risk-adjusted expected rates of return as discount rates in valuation. Why do risk-adjusted expected rates of return increase with risk?

Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.

Under the assumption of clean surplus accounting, how would you compute total dividends paid to common equityholders in order to value the firm?

If dividend projections include the effect of inflation, then the discount rate used should be a ____________________ rate.

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

Why are dividends value-relevant to common equity shareholders?

To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

The CAPM computes expected rates of return on common equity capital using the following model: E[REj] = E[RF] + bj x {E[RM] - E[RF]} What are the roles of each of the three components of this model?

In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a ________________________________________.

One criticism in using the CAPM to calculate the cost of equity capital is that and the ____________________ are quite sensitive to the time period and methodology used in their computation.

The CAPM computes expected rates of return on common equity capital using the following model: E[R_Ej] = E[R_F] + b_j x {E[R_M] - E[R_F]} What are the roles of each of the three components of this model?