Question

No explanation only Answers(Thums up for all answer)

18.) The Price-Earnings valuation model estimates the price of a share of stock today as the ______.

a. sum of a forward looking P/E multiple and the EPS in the next period

b. product of the firm’s historic P/E multiple and the EPS in the next period

c. product of a forward looking P/E multiple and the EPS in the next period

d. product of a forward looking P/E multiple and the current EPS

19.) Which of the following statements about economic value added (EVA) is NOT true?

a. EVA is a measure of value creation.

b. EVA is a process for attempting to create value.

c. If a firm generates positive EVA then it increases shareholder value.

d. all of the above are true

20.) Which of the following is NOT a factor that would be analyzed by a firm as part of an external SWOT analysis?

a. expected inflation

b. expected growth of firm-wide sales

c. expected changes in GDP

d. political uncertainty

21.) If a firm is projected to increases revenues by 10% AND net income by the same amount, which of the following must be TRUE?

a. there can be no variable costs

b. there can be no fixed costs

c. there can be no taxes

d. the change in expenses must be exactly equal to the change in revenues

22.) Rogue River Retail Inc. has a before-tax cost of debt of 8.00%, a cost of equity of 12.00%, a tax rate of 30.00% and no preferred stock outstanding. If the firm is made up of 50% debt and 50% equity, what is the firm’s after-tax cost of borrowing?

a. 12.00%

b. 11.60%

c. 8.00%

d. 5.60%

23.) Which of the following is likely to lead to an increase in a firm’s cost of debt financing?

a. an increase in expected inflation

b. an increase in the riskiness of assets

c. an increase in the average age of debt financing

d. all of the above

24.) Which of the following equations for the book value plus adjustment method is correct? a. value of equity (VE) = market value of equity - adjustments

b. value of equity (VE) = book value of equity + adjustments

c. value of equity (VE) = book value of equity - adjustments

d. value of equity (VE) = market value of equity + adjustments

Answer 1

Answer 18) Option d

Answer 19) Option b

Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis

ITS Formula is EVA

where WACC is weighted average cost of capital

NOPAT is Net operating profit after tax i.e = operating income *(1 - Tax rate) or EBIT(1 - Tax rate)

It is not a process therefore option b is wrong

Answer 20) Option b

Expected growth of firm wide sale will not be concidered as it is an internal environmental analysis not external

Answer 21) Option a

There can't be avariable cost because beacause variable cost is function of quantity sold and if revenue is going up assuming both quantity sold and selling prices is changing resulting in 10% increase in revenue then VC must change thus NI will not increase by 10% in such a case, therefore varicable cost must be zero

{Revenue(Q*SP) - variable cost (Q*CP) - Fixed cost - Interest}*(1- tax rate) = Net income

Answer 22) option d 5.6%

After tax cost of borrowing = Before tax cost of borrowing * (1- tax rate)

= 0.08*(1-0.3)

= 0.056 i.e 5.6%

Answer 23) option a

where i is nominal interest rate, r is real interest rate and pie is expected inflation

So if expected inflation goes up nominal interest rate will go up causing an increse in cost of debt i.e nominal interest rates.

Answer 24 b