5) According to MM, leverage may increase expected earnings per share but still leave the share price unchanged because: A) the firm is less risky. C) the required return on equity increases. B) the firm's operating risk decreases. D) the number of shares is decreased

5) According to MM, leverage may increase expected earnings per share but still leave the share price unchanged because: A) the firm is less risky. C) the required return on equity increases. B) the firm's operating risk decreases. D) the number of shares is decreased

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you've done in previous problems, but it focuses on a firm's free cash flows (FCFS) instead of its dividends. Some firms don't pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Tropetech Inc. has an expected net operating profit after taxes, EBIT(1-T), of $2,400 million in the coming year. In addition, the firm is expected to have net capital expenditures of $360 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow ( FCF) is Tropetech Inc. expected to generate over the next year? $2,085 million $2,715 million $43,481 million $1,995 million Tropetech Inc.'s FCFs are expected to grow at a constant rate of 3.90%…
Which statement about book value per share (BVPS) is true? A. Market price per share usually approximates BVPS. B. BVPS can be misleading because it is based on historical cost. C. Market price per share greater than BVPS is an indication of an overvalued stock. D. BVPS is the amount that would be paid to shareholders if the firm is sold to another firm.
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.68 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D1) Horizon value (P₁) Intrinsic value of Portman's stock Value
Regarding the EPS fallacy, which of the following statements is correct: a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy. b. All given statements are correct. c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world). d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.
The price-to-earnings ratio: ( al is of little value to investors these days due to the fact that market values far exceed camings values. b) is important to investors because a higher P/E ratio means lesser growth in earnings over time. C) develops an investor's knowledge of the price of various stocks in a single industry. d) is important to investors because a higher P/E ratio means greater growth in earnings over time.
The value of an ordinary share Select one or more: a. Will fall if future profit forecasts are higher than expected b. Is always at its fundamental value c. Can rise and fall along with market sentiment d. Will rise if a firm introduces some cost saving innovation
The dividend growth model is only useful for estimating a stock's value when the A. Stock's beta is strickly less than the market beta B. Stock's required return is strictly less than the constant growth rate in dividends C. Stock's growth rate in dividends is strictly greater than zero D. Stock pays dividends
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $14,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,130 million, and net operating working capital (NOWC) is expected to increase by $35 million. How much free cash flow (FCF) is Charles Underwood Agency Inc. expected to generate over the next year? $16,295 million $12,105 million $288,976 million $12,035 million…
When the yield curve becomes inverted and slopes downard, it is an indicator of: a) A coming economic boom because investors are being compensated at higher yields for the added risk of investing in longer-term bonds b) Little economic difference because the yield curve will only matter if it effects corporate strategic investment c) A coming recession because it shows investors want to tie up their money longer, even if it provides a lower annual rate of return
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year.
State whether the following statement is true or false and provide a written explanation of your answer. “The Dividend Growth Model (a.k.a Gordon Model) is a ridiculous model to use to value a share. Firstly, it assumes that the company will be around forever, whereas we know that lots of companies will eventually disappear because of takeovers and mergers and this model doesn’t allow for that. Secondly, it assumes that dividends grow at the rate of inflation which is not necessarily correct.”
If a firm went from zero debt to successively higher levels of debt, why would you expect its stock price to first rise, then hit a peak, and then begin to decline?

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