Question 1

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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Question 2

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 3

Why are dividends value-relevant to common equity shareholders?

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Question 4

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

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Question 5

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

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Question 6

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

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Question 7

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 8

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 9

Bridgetron
An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information:
  
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 10

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 11

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 12

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 13

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 14

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

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Question 15

A company with a new Capital structure will increase the __________ and at the same time the __________ risk.

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Question 16

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25. In addition, the excess return over the risk-free rate is 6.3%. Calculate the firm's cost of equity capital using the CAPM model.

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Question 17

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

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Question 18

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 19

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

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Question 20

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(n) ___________________________________.

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

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?

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 ______________________________.

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

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

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.

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?

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

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?

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.

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?

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

A company with a new Capital structure will increase the and at the same time the risk.

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25. In addition, the excess return over the risk-free rate is 6.3%. Calculate the firm's cost of equity capital using the CAPM model.

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

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

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

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?

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 ______________________________.

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

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

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.

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?

Bridgetron An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

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

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.

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?

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

A company with a new Capital structure will increase the __________ and at the same time the __________ risk.

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25. In addition, the excess return over the risk-free rate is 6.3%. Calculate the firm's cost of equity capital using the CAPM model.

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

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

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?

A company with a new Capital structure will increase the and at the same time the risk.