1. True or False? - The deviaton between a company's market value and its book value depends on its ability to generate "abnormal earnings."
2. Which of the following are advantages of defining values in terms of ROE's (choose all that apply)
A.It uses the same key measures of performance that are decomposed in a standard financial analysis B.ROE's are much easier to calculate than other performance measurements C.It enhances the analyst's ability to evaluate the reasonableness of their forecasts by benchmarking them with REO's of other companies in the industry D.All of the above
3. Companies whose earnings and cash flows are less sensitive to economic changes, such as regulated utilities or supermarket chains, will have risk betas A.less than 1 B.greater than 1 C.less than 0 D.None of the above. Companies whose performance is highly sensitive to economy-wide changes, such as producers of luxury goods, manufacturers of captial goods and construction companies will have risk betas.
A.less than 1 B.less than 0 C.greater than 1 D.none of the above
4. JWU Manufacturing is a "darling" of Wall Street analysts. Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectation of the firm's long-term average ROE?
A.20% B.25% C.30% D.There is not enough information to make this calculation 4 points
5. Yahoo Finance has reported JWU Construction's equity beta to be 1.1. The 10yr Treasury is currently yielding 2.5%. The historical risk premium for the construction industry is 6.5%. What is JWU Construction's Cost of Equity.
A.5.5% B.9.65% C.9.25% D.There is not enough information to make this calculation.