1 .Anequity valuation model that values a firm based on the market value of itsoutstanding debt and equity securities, relative to a firm fundamental, isa(n):
A)asset-based model.
B)enterprise valuemodel.
C)market multiplemodel.
The correct answer wasB
An enterprise valuemodel relates a firm’s enterprise value (the market value of its outstandingequity and debt securities minus its cash and marketable securities holdings)to its EBITDA, operating earnings, or revenue.
2 . Dividends onnon-participating preference shares are typically:
A)a fixed percentageof par value.
B)a contractualobligation of the company.
C)lower than thedividends on common shares.
The correct answer wasA
Similar to theinterest payments on a debt security, dividends on non-participating preferenceshares (preferred stock) are typically fixed. Unlike the interest payments on adebt security, the company is not contractually obligated to pay preferreddividends. Preferred dividends are typically higher than a firm’s commondividends.
3 . A firm has aprofit margin of 10%, an asset turnover of 1.2, an equity multiplier of 1.3,and an earnings retention ratio of 0.5. What is the firm's internal growthrate?
A)7.8%.
B)6.7%.
C)4.5%.
The correct answer was A
ROE = (Net Income /Sales)(Sales / Total Assets)(Total Assets / Total Equity)
ROE = (0.1)(1.2)(1.3)= 0.156
g = (retentionratio)(ROE) = 0.5(0.156) = 0.078 or 7.8%
4 . Liquidity ofprivate equity is most likely:
A)greater thanliquidity of public equity.
B)less than liquidityof public equity.
C)about equal toliquidity of public equity.
The correct answer wasB
Private equitysecurities are not registered to be traded in a public market, and thereforeare less liquid that public equity.
5 . In its latest annualreport, a company reported the following:
Net income = $1,000,000
Total equity = $5,000,000
Total assets = $10,000,000
Dividend payout ratio = 40%
Based on thesustainable growth model, the most likely forecast of the company’s futureearnings growth rate is:
A)6%.
B)12%.
C)8%.
The correct answer wasB
g = (RR)(ROE)
RR = 1 ? dividendpayout ratio = 1 ? 0.4 = 0.6
ROE = NI / TotalEquity = 1,000,000 / 5,000,000 = 1 / 5 = 0.2
Note: This is the"simple" calculation of ROE. Since we are only given these inputs,these are what you should use. Also, if given beginning and ending equitybalances, use the average in the denominator.
g = (0.6)(0.2) = 0.12or 12%
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