1 . An enterprise valuemultiple is typically calculated as the ratio of enterprise value to:
A)sales.
B)EBITDA.
C)net income.
The correct answer wasB
An enterprise valuemultiple is typically calculated as the ratio of enterprise value to EBITDA orsome other measure of operating income. Net income is not typically usedbecause it reflects a firm’s current capital structure and non-cash charges,and because the ratio becomes meaningless when net income is negative.
2 . Assuming therisk-free rate is 5% and the expected return on the market is 12%, what is thevalue of a stock with a beta of 1.5 that paid a $2 dividend last year ifdividends are expected to grow at a 5% rate forever?
A)$12.50.
B)$17.50.
C)$20.00.
The correct answer wasC
P0 = D1 / (k ? g)
Rs = Rf + β(RM ? Rf) =0.05 + 1.5(0.12 ? 0.05) = 0.155
D1 = D0(1 + g) = 2 ×(1.05) = 2.10
P0 = 2.10 / (0.155 ?0.05) = $20.00
3 . A stock isexpected to pay a dividend of $1.50 at the end of each of the next three years.At the end of three years the stock price is expected to be $25. The equitydiscount rate is 16 percent. What is the current stock price?
A)$24.92.
B)$19.39.
C)$17.18.
The correct answer wasB
The value of the stocktoday is the present value of the dividends and the expected stock price,discounted at the equity discount rate:
$1.50/1.16 +$1.50/1.162 + $1.50/1.163 + $25.00/1.163 = $19.39
4 . Use the followingdata to analyze a stock's price earnings ratio (P/E ratio):
§ The stock's beta is 1.2.
§ The dividend payout ratio is 60%.
§ The stock's expected growth rate is 7%.
§ The risk free rate is 6% and the expectedrate of return on the market is 13%.
Using the dividenddiscount model, the expected P/E ratio of the stock is closest to:
A)5.4.
B)8.1.
C)10.0.
The correct answer wasB
k = ER = Rf + Beta(RM? Rf) = 0.06 + (1.2)(0.13 ? 0.06) = 0.144
Dividend payout ratio= 0.60
P/E = div payout / (k? g) = 0.6 / (0.144 ? 0.07) = 8.1
5 . Compared to apublicly traded firm, a private equity firm is most likely to:
A)be more concernedwith short-term results.
B)exhibit strongercorporate governance.
C)disclose lessinformation about its financial performance.
The correct answer wasC
Private equity firmsare not held to the same financial reporting requirements as publicly tradedfirms. Less public scrutiny and limited financial disclosure may lead to weakercorporate governance. However, with less pressure from public shareholders, aprivate equity firm is typically more able to focus on long-term performance.
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