BV Cheatsheet.docx

# BV Cheatsheet.docx - BV Cheatsheet True False Question 1 In...

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BV Cheatsheet True / False Question 1. In the context of the CAPM, an asset with a beta of 1 has an expected return that is equal to the expected stock market return. TRUE : E(r i ) – r f = 1[E(r m ) – r f ] -> E(r i ) = E(r m ) 2. In DCF valuation, a series of cash grows that grow forever at 6% annually with a risk-adjusted discount rate of 8% has a finite present value. TURE: g < r -> V o <∞ 3. In DCF valuation, a 100% equity reinvestment rate results in a dividend yield that is equal to zero. TURE 4. If a company has a cost of equity higher than the after-tax cost of debt, then the company should seek debt financing to increase its value. TRUE: DPY = 1 – RiR = 1 – 1 = 0 5. Free cash flow to the firm is very dependent on the capital structure and debt refinancing of the firm we are trying to value. FALSE : if r e > r d (1 – T) -> WACC < r e if D > 0 6. The price of platinum has a beta of -2 with the stock market return. In the context of the CAPM, the expected change in the price of platinum is negative . FALSE by definition: E(r platinum )-r f = -2[E(r m )-r f ] -> E(r platinmum ) = -2E(r m )+3r f ( depends! ) 7. A major assumption behind discounting free cash flow to equity is that the free cash flow to equity will be repaid as either dividends or share buybacks as soon as it is generated by the firm. TRUE by definition of FEFE 8. The geometric average return exceeds the arithmetic average return if and only if the return is all periods are not equal to the same number. FALSE as r geom. ≤ r arithm. 9. In the dividend discount model, the expected stock return is equal to the expected capital gain plus the expected capital gain. (Assuming all other inputs remains unchanged.) FALSE: capital gain should be div. yield then its true 10. The intrinsic value given by a two-stage DCF model will exceed the intrinsic value given by the H model if all the inputs, i.e., growth rates, dividends per share, cost of equity, are identical. FALSE 11. In the context of the CAPM, an asset with beta of 1.2 has an expected excess return that is greater than the expected stock market return. FALSE: E(r ) – r f = 1.2[E(r m ) – r f ] > E(r ) = E(r m ) -> depends! 12. In DCF valuation, a 0% equity reinvestment rate results in a dividend yield that is equal to zero. TRUE: considered to be FCFE so these were no dividends involved 13. If a company is facing a corporate tax rate of 100%, the company’s levered beta will be equal to the company’s unlevered beta . TRUE: β L = βu[1 + D/E × (1-1)] = βu 14. Free cash flow to equity can never be smaller than the net income of a company. FALSE: true if net

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