Question

true or false

In the context of the adjusted present value (APV) model of firm valuation, one major assumption is that firms will have a fixed level of debt in the future.

The business with a net present value (NPV) of a firm equal to $0 is an example of a fairly valued business. (All else equal.)

A company forecast to have negative economic value added (EVA) forever, will be trading at
EV/Capital ratio that is smaller than one. (All else equal.)

Discounting free cash flows to equity (FCFE) at the weighted-average cost of capital
(WACC) will tend to overstate the true intrinsic value of equity.

In practice, we can find a firm's net profit margin (NPM) by dividing the firm's PS ratio by the
firm's PE ratio.

Answer 1

1 True.

APV is the NPV of a project if finced solely by the debt.

APV shows benefits of tax shields from tax deductible interest payments

2. False

NPV =0 is a indifference (No Loss no gain).

If NPV of firm is 0 it means it's performance can be accepted or rejected.

If NPV is lesser than zero that firm is underperforming and NPV is greater than zero it is performing well.

3.True

Economic value is negative means not generating value from the funds invested in the business

4.True.

If cash flows are not discounted using cost of capital (Weighted average cost of capital) the cash flows will not give the actual values since the future cash flows not bring down to today's present value.

5.False

P/S ratio means Price to Sales ratio which means it measures the total value that investors place on the company in comparison to its revenue

If PSR is greater than 1 it means investors are paying more.

If PSR is lesser than 1 it means investors are paying lesser.

If PSR is zero it is indifference.

Price Earnings ratio is used to value the stock price using future earnings.