Question

When performing comparable analysis the ideal comparable firm will have each of the following characteristics EXCEPT:

it has similar risk as measured by variance.

it has similar growth of cash flow prospects.

these are all desirable comparables.

it has a similar dividend payout.

When performing comparable analysis the ideal comparable firm will have each of the following characteristics EXCEPT:

it is of a similar size.

these are all desirable comparables.

it is in a similar industry.

it has similar risk as measured by beta.

Based solely on risk considerations, a mixed debt and equity firm does not have to worry about any financial obligations related to creditors.

True

False

All else equal, an individual investor would prefer ________ even if rates on both are equal, since ________ can be deferred.

dividends to capital gains; capital gains

dividends to capital gains; dividends

Investors are indifferent to capital gains vs dividends.

capital gains to dividends; capital gains

Answer 1

Performing Comparable analysis the ideal comparable firm should have the following characteristics-

1. The Industry of the ideal comparable firm should be same as that of the firm under analysis.

2. The Size of the comparable firm should be same as that of the firm under analysis. The size can be estimated based on revenue or other factors.

3. Capital Structure of the comparable firm should be considered as the capital structure with very high debt will increase the risk of default.

4. The comparable firm should have same growth potential as that of the firm under analysis.

a. When performing comparable analysis the ideal comparable firm will have each of the following characteristics EXCEPT:

It has similar dividend payout

b. When performing comparable analysis the ideal comparable firm will have each of the following characteristics EXCEPT:

these all are desirable comparisons

c. Based solely on risk considerations, a mixed debt and equity firm does not have to worry about any financial obligations related to creditors.

False as presence of debt in the capital structure induces risk. Moreover the percentage of debt with respect to equity in the capital structure is important as increase and decrease in the percentage of debt will increase and decrease the risk of default.

d. All else equal, an individual investor would prefer Dividends even if rates on both are equal, since Capital Gains can be deferred.

Capital Gains can be deferred by the individual investor in order to reduce the tax liability. The tax rate on the capital gains is different.