Full name:………………….……..………..………..; Student ID No:.………………….

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Choose the best answer

1. Which of the following assets is best suited for relative valuation?

a. An untraded, unique asset with nothing comparable or similar to it.
b. A traded, unique asset with nothing comparable or similar to it.
c. An asset that is similar to other assets, none of which have traded prices.
d. An asset that is similar to other assets, many of which are traded at regular
intervals.
e. None of the above
1. Which of the following assets is best suited for relative valuation?
a. An untraded, unique asset with nothing comparable or similar to it.
b. A traded, unique asset with nothing comparable or similar to it.
c. An asset that is similar to other assets, none of which have traded prices.
d. An asset that is similar to other assets, many of which are traded at regular
intervals.
e. None of the above
1. Which of the following assets is best suited for relative valuation?
a. An untraded, unique asset with nothing comparable or similar to it.
b. A traded, unique asset with nothing comparable or similar to it.
c. An asset that is similar to other assets, none of which have traded prices.
d. An asset that is similar to other assets, many of which are traded at regular intervals.
e. None of the above

2. What type of investor will get the biggest payoff from using intrinsic valuation?
a. An investor with a short time horizon that believes that markets are always wrong.
b. An investor with a long time horizon that believes that markets are always wrong.
c. An investor with a short time horizon that believes that markets make mistakes on pricing
but that they correct them over time.
d. An investor with a long time horizon that believes that markets make mistakes on pricing
but that they correct them over time.
e. An investor that believes that markets are always right.

3. Which of the following assets is best suited for intrinsic valuation?

a. A finite life asset with no cash flows associated with it
b. An infinite life asset with no cash flows associated with it
c. An asset with uncertain cash flows over any life period
d. An asset with cash flows contingent on an event happening
e. None of the above

4. Which of the following would you do if you were valuing the equity in a
business?
a. Discount cash flows before debt payments at the cost of equity
b. Discount cash flows after debt payments at the cost of equity
c. Discount cash flows before debt payments at the cost of capital
d. Discount cash flows after debt payments at the cost of capital

5. Which of the following would you do if you were valuing the entire business?
a. Discount cash flows before debt payments at the cost of equity
b. Discount cash flows after debt payments at the cost of equity
c. Discount cash flows before debt payments at the cost of capital
d. Discount cash flows after debt payments at the cost of capital

6. In valuation, your risk free has to be a long term, default free rate. When valuing a
company in US dollars, we often use the 10 year US T. bond rate as the risk free rate. In the
last few years, there have been questions about whether the US treasury is really default free.
If you share these concerns, which of the following will you do, assuming that you are still
estimating cash flows in US dollars?
a. Continue to use it the 10 year bond rate the risk free rate since you have no choice
b. Switch to using the US treasury bill rate, since default is less likely in the short term
c. Estimate a default spread for the US government and reduce the treasury bond rate by that
spread
d. Use the rate on a 10 year Swiss Government bond, denominated in Swiss francs since the
Swiss government has no default risk
e. None of the above

7. Lipscott Inc. is a publicly traded company that has $100 million in bank loans on
its books, with a stated interest rate of 3% and $150 million in publicly traded
bonds, with a coupon rate of 3.6%. The company currently has a bond rating of
BBB, with a default spread of 1.5% over the risk free rate. If the current T.Bill rate
is 1%, the tenPyear T.Bond rate is 3.5% and the marginal tax rate is 35%, what is
the prePtax cost of debt?
a. 3.36% b. 3.60% c. 5.00% d. 2.50% e. 3.50%

8. Faraday Enterprises is a publicly traded company. It currently has 10 million shares

trading at $12/share and $150 million in book value of equity. The firm also has
book value of debt of $ 75 million and market value of debt of $ 80 million. The
cost of equity for the company is 9%, the prePtax cost of debt is 4% and the
marginal tax rate is 40%. What is the cost of capital?
a. 7.4% b. 7.0% c. 7.7% d. 6.36%

9. The information follows:

What is the arithmetic average annual growth rate over the last five years?
a. 20.00% b. 14.87% c. 21.25% d. 12.47% e. None of the above

10. The standard approach to estimating betas is to run a regression of returns of an

individual stock against returns on a market index. Which of the following is a problem
with this approach?
a. It yields an estimate with significant standard error.
b. It is subject to estimation choices: different regression periods, return intervals and
market indices.
c. It will not yield a “good” estimate for the future, if a company s business mix has changed
recently.
d. It will not yield a “good” estimate for the future, if a company s financial leverage has
changed over the regression period
e. All of the above.

11. One concern with using sectorTaverage betas,even if you adjust for financial leverage, is
that you are assuming that the operating leverage for your firm is similar to that
of the other firms. Assume that 70% of the costs in your company are fixed costs,
whereas only 50% of the costs in the average company in the sector are fixed costs. If
the unlevered beta for the sector is 0.80, what would you expect the unlevered beta for
your company to be?
a. Higher than 0.80 b. Lower than 0.80 c. About 0.80

12. Lixit Inc. is a publicly traded company that reported $100 million in revenues in
the most recent fiscal year that ended on December 31. You are valuing the
company in April and know that the company reported $30 million in revenues for
the first quarter, up from the $22 million it reported in revenues in the same quarter
of the previous year. In valuing Lixit today, which of the following numbers
would you use for your base year revenues, if you want an updated valuation?
a. $ 100 mil b. $108 mil c. $92 mil d. $120 mil e. $130 mil

13. You are analyzing Sterling Stores, a retail company. The company reported $25 million
in preMtax operating income in the most recent year and invested capital of
$125 million. The operating income, though, was computed after operating lease
expenses that amounted to $25 million in the most recent year and the company has
commitments to make $20 million in lease payments every year for the next
8 years. Assuming that Sterling Stores has a pre tax cost of debt of 4% and that
you decide to capitalize operating leases, what is the pre tax return on capital is for Sterling
Stores?
a. 26.53% b. 10.53% c. 19.26% d. 12.77% e. None of the above

14. The corp. generated $20 million in aftertax operating income on revenues of $100
million during the course of the most recent year. You expect revenues to grow 10%
a year next year and margins to stay stable. The firm s non cash current assets
are $40 million and its non debt current liabilities are $50 million, and non cash
working capital as a percent of revenues is expected to remain unchanged next
year. If the net cap ex is expected to be $10 million next year, what is your estimate
of the FCFF for the next year?
a. $13 mil b. $11 mil c. $8 mil d. $23 mil e. None of the above

15. The corp. is a manufacturer of vacuum cleaners and you have estimated a FCF of $50
million for firm for the most recent year. The corp has total debt decreased from $100 to
$85 million during the course of the year and it reported interest expense of $10
million for the year. If the tax rate is 30%, estimate the FCFE for the most recent
year.
a. $ 25 million b. $ 58 million c. $ 28 million d. $ 55 million

16. Bank paid out $ 80 million in dividends on net income of $100 million in the
most recent year. The book value of equity for the firm is $800 million. Assuming
that the bank maintains its current payout ratio and return on equity in
perpetuity, what is the expected growth in earnings per share in perpetuity?
a. 8% b. 2% c. 5% d. 2.5%

17. The corp. is a tourism company that reported $10 million in net income on
a book value of equity of $110 million in the most recent year; the
company generated $ 1 million in afterStax interest income on a cash
balance of $20 million. The company also reported net capital
expenditures of $4 million, an increase in working capital of $ 2 million
and an increase in total debt of $3 million during the year. Assuming that
it maintains its current nonScash ROE and equity reinvestment rate, estimate
the expected growth in nonScash net income in the future.
a. 3.33% b. 6.67% c. 3.33% d. 6.00%

18. One argument that is used by those who use multiples/relative valuation is that
there are fewer assumptions in relative valuation than in intrinsic valuation. Is this
true or false?
a. True b. False

Explain:
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19. The corp. has 5 million shares outstanding, trading at $20/share. The company has
one convertible bond, with a face value of $ 100 million, a ten year maturity and a
coupon rate of 2%; the bond has a market value of $120 million. If the current cost
of equity for the firm is 10% and the pretax cost of debt is 5%, what is the cost of
capital for the firm? The marginal tax rate is 40%
a. 5.20% b. 6.18% c. 7.55% d. 8.25% e. None of the above

20. Stores is a retail firm that reported $1 billion in revenues, $80 million in after-tax
operating income, and noncash working capital of –$50 million last year.
a. Assuming that working capital as a percent of revenues remains unchanged next year and
that there are no net capital expenditures, estimate the free cash flow to the firm if revenues
are
expected to grow 10%.
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b. If you are projecting free cash flows to the firm for the next 10 years, would you make the
same assumptions about working capital? Why or why not?
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