Question

true or false?

1,In the context of DCF, a company maintaining a capital structure policy of zero debt will have a levered equity beta equal to its unlevered equity beta. (All all other inputs remain unchanged.)

2,If the corporate income tax rate were to drop to 0% then the use of debt will become more desirable in terms of increasing net income and ROE.

3,Not every company with growing earnings and dividends will be worth even more if management were to reinvest a larger fraction of the company's earnings.

Group of answer choices

4,In DCF valuation, capitalizing research and development (R&D) expenditures can lead to a material change in the company's re-stated ROE.

5,In the context of CAPM, a risky asset with positive beta (beta>0) will have a positive expected excess return. (Assuming investors are risk-averse.)

6,The modified dividend payout ratio will, typically, exceed the conventional dividend payout ratio. (Assuming the company buys back some shares.)

7,In the context of DDM, a dividend payout ratio equal to 100% implies that the future growth rate of earnings per share (EPS) will be equal to 100%.

Answer 1

1,In the context of DCF, a company maintaining a capital structure policy of zero debt will have a levered equity beta equal to its unlevered equity beta. (All all other inputs remain unchanged.)

True. Beta (Levered) = Beta (Unlevered) * (1 + (1 - Tax)(Debt/Equity))

as the Debt is Zero = Beta (Levered) = Beta (Unlevered) * (1 + (1 - Tax)(0))

  Beta (Levered) = Beta (Unlevered)

2,If the corporate income tax rate were to drop to 0% then the use of debt will become more desirable in terms of increasing net income and ROE.

False. The company opts to use debt to get benefit of tax shield on interest charges. if the tax rate itself is zero then the company wont use debt.

3, Not every company with growing earnings and dividends will be worth even more if management were to reinvest a larger fraction of the company's earnings.

False. When the company reinvests large fraction of earnings it will result in increase of value of firm when compared with the company which doesn't reinvest  

4,In DCF valuation, capitalizing research and development (R&D) expenditures can lead to a material change in the company's re-stated ROE.

True. when the company treats R& D as capital expenditure it will result in reduction of ROE because (ROE = Return / Equity) and Equity includes R&D expenditure

5,In the context of CAPM, a risky asset with positive beta (beta>0) will have a positive expected excess return. (Assuming investors are risk-averse.)

True. when Beta is more than zero the asset will have positive expected excess return

6,The modified dividend payout ratio will, typically, exceed the conventional dividend payout ratio. (Assuming the company buys back some shares.)

False it will be the less because (Dividend payout ratio = Dividends / Net Income) and when the company buy back shares it will result less dividend in future thereby reducing Dividend payout ratio

7,In the context of DDM, a dividend payout ratio equal to 100% implies that the future growth rate of earnings per share (EPS) will be equal to 100%.

False. when the dividend payout ratio equal to 100% it means retention ration Zero which in turn means that the growth rate is Zero.