Valuation is the process by which forecasts of performance


1- The value of a company can be estimated by applying a price-to-earnings ratio to a forecast of the company's earnings for the coming year. (t/f)

2-If a company can only earn the required rate of return on its book value, then investors should not be willing to pay more than book value for that company's stock. (t/f)

3- Valuation is the process by which forecasts of performance are converted into estimates of price. (t/f)

4-Various valuation methods are rarely used simultaneously. (t/f)

5- The magnitude of a company's value-to-book ratio depends heavily on its

A. expected book equity growth B. profit margins C. sales turnover D. none of the above

6-Companies can grow their equity base by (chose all that apply)

A. taking out new long term debt B. issuing new stock C. taking on additional short term debt D. reinvesting profits

7-Valuation under the Discounted Cash Flow method involves Valuation under the Discounted Cash Flow method involves

A. Forecasting free cash flows available to equity holders over a finite forecast horizon B. Forecasting free cash flows beyond the terminal year based on some simplified assumptions C. Discounting free cash flows to equity holders at the cost of equity D. All of the above

8-The phrase "terminal year" refers to

A. the year when analysts believe the company will cease to exist B. the year the company files bankruptcy C. the last year in any given forecast D. the year the board expects the CEO to retire

9-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

10-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

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Financial Management: Valuation is the process by which forecasts of performance
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