Which of the following statements are NOT correct about the four models we used to value...

Which of the following statements are NOT correct about the four models we used to value stocks?

A. The Dividend-Discount model assumes that dividends are the only cashflow the firm provides to investors.

B. The Total Payouts model includes both dividends and share repurchases, but estimating share repurchases is difficult.

C. Using valuation based on comparable firms does not require strong assumptions about firm similarity.

D. The Discounted Free Cash Flow model requires us to know the firm’s cash and debt to calculate the Enterprise Value.

Solutions

Expert Solution

The following are NOT correct statements about the four models we used to value stocks.

C. Using valuation based on comparable firms does not require strong assumptions about firm similarity.

Reason: A comparable company analysis is a process used to evaluate the value of a company, it operates under strong assumption that similar companies should have valuation multiples such as EV/EBITDA.

D. The Discounted Free Cash Flow model requires us to know the firm’s cash and debt to calculate the Enterprise Value.

Reason: Discounted cash flow model helps to determine the value of an investment based on its future cash flow but here only cash mentained but not considered as parent or future cash. Debt is outflow of cash so this model aplies to both financial investment for investors and for business owners to charge to their businesses such are purchasing new equipment.

The following are the right statements about the four models we used to value stocks.

A. The Dividend-Discount model assumes that dividends are the only cashflow the firm provides to investors.

Reason: The dividend discount model provides easy way to estimate a fair stock price. This was developed under the assumption that the intrinsic value of stock so dividends are essentially the positive cash flows generated by th company and provides to investors.

B. The Total Payouts model includes both dividends and share repurchases, but estimating share repurchases is difficult.

Reason: The meaning of total payouts model is how much money a company is returning to shareholders versus how much it is keeping on hand to reinvest for the purpose of growth, pay debts, diversification etc. Reinvest is also called as retained earning and repurchase. Yes it is dificult to calculate.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Which of the following statements is correct with regards to the concept of Qualitative Models? They...

Which of the following statements is correct with regards to the concept of Qualitative Models? They are: A. Based on the judgement, experience, and acumen of an analyst B. A subset of the quantitative models C. Superior to quantitative models D. All of these E. None of these

Which of the following statements ARE CORRECT about hypothesis tests we cover in Stats I? Select...

Which of the following statements ARE CORRECT about hypothesis tests we cover in Stats I? Select all that apply! Question 3 options: We use the t-distribution when we conduct a hypothesis test about a population mean. Researchers get to choose the significance level. A few popular choices are 10%, 5% and 1%. However, it is not possible to choose 0%! The Rejection Region approach and the p-value approach always agree. Meaning, our conclusion concerning whether or not to reject Ho...

Which of the following statements about the cost of capital is CORRECT ?

Which of the following statements about the cost of capital is CORRECT ?Select one:a. Both the cost of debt and equity financing will decrease when a firm expands into a risky new area.b. Both the cost of debt and equity financing will decrease when a nuclear plant company encounters a ban on nuclear power generation in certain states.c. The WACC of a firm will decrease when investors become more risk averse.d. Both the cost of debt and equity financing will...

Which of the following statements about valence electrons is correct?

Which of the following statements about valence electrons is correct? Li has 1 valence electron and S has 6 valence electrons Mg has 12 valence electrons and O has8 valence electrons K has 19 valence electrons and Cl has 17 valence electrons Al has 13 valence electrons and C has 12 valence electrons Li has 3 valence electrons and Na has 11 valence electrons

Which of the following statements is CORRECT about a yield curve?

Which of the following statements is CORRECT about a yield curve? a. A yield curve reflects the relationship between bond yields and the inflation rate. b. A humped yield curve reflects interest rates lower than short term maturities. c. A normal yield curve is generally humped. d. An upward sloping yield curve is referred to as abnormal or inverted. e. A downward sloping yield curve is referred to as abnormal or inverted

are the following statements about the bind duration correct ? changes in the value of a...

are the following statements about the bind duration correct ? changes in the value of a bond are invesely related to changes in the rate of return _______ correct / incorrect Short term binds have greater interest rate risk than long term bonds _______ correct / incorrect As the interest rate increase, the bond becomes more sensitive to further rate changes ________ correct / incorrect As the bond coupon increases, the bond becomes less sensitive to interest rate changes ________...

Which of the following statements concerning models of product differentiation, if any, are correct? The more...

Which of the following statements concerning models of product differentiation, if any, are correct? The more new products draw their customers from those who currently are buying existing products in the same market, the more likely we have too much product variety from the point of view of efficiency. The more new products draw their customers from those who currently are not buying existing products in the market in question (new customers to the market), the more likely we have...

With regard to regression models, which of the following statements is correct? i) Linear restrictions on...

With regard to regression models, which of the following statements is correct? i) Linear restrictions on regression parameters cannot be tested using an F-test. ii) The general-to-specific approach (also called “top-down”) starts with a model containing all explanatory variables. Subsequently, the least significant variables are dropped one by one until all of the variables remaining in the model are statistically significant. iii) Multicollinearity in a regression results in high t-statistics for individualexplanatory variables and a failure of the F-test to...

Which of the following statements are correct? a) HCFCs are used as the replacement of CFCs...

Which of the following statements are correct? a) HCFCs are used as the replacement of CFCs because they do not reach the Stratosphere. b) HFCs are used as the replacement of CFCs (and HCFCs) because do not contain chlorine and so do not have the ozone depletion potential associated with the well-established chlorine catalytic cycles. c) Climate projections indicate that the ozone layer will return to 1980 levels within the next 20 years.

Which of the following statements is correct? a. The annual report contains four basic financial statements:...

Which of the following statements is correct? a. The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing. b. Although the annual report is geared toward the average stockholder, it represents financial analysts' most complete source of financial information about the firm. c. The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future...

Subjects