Reading 46: Discounted Dividend Valuation - LOS c ～ Q1-4 return, percent, expected, discount, class

cfaedu

1.If an asset’s beta is 0.8, the expected return on the equity market is 10.0 percent, and the appropriate discount rate for the Gordon model is 9.0 percent, what is the risk-free rate?

A)   2.50%.

B)   5.00%.

C)   6.50%.

D)   7.25%.

2.In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset’s beta is used to determine the amount of:

A)   risk-free rate applicable to the time period of the investment.

B)   equity premium.

C)   future cash flow expected from the firm.

D)   the expected return in addition to the return required by the risk of the position.

3.If the risk-free rate is 6 percent, the equity premium of the chosen index is 4 percent, and the asset’s beta is 0.8, what is the discount rate to be used in applying the dividend discount model?

A)   10.80%.

B)   8.00%.

C)   7.80%.

D)   9.20%.

4.Which of the following is NOT a valid approach to determining the appropriate discount rate for a firm’s dividends?

A)   Capital asset pricing model (CAPM).

B)   Free cash flow to firm (FCFF).

C)   Asset pricing theory (APT).

D)   Bond yield plus equity risk premium.

cfaedu

答案和详解如下：

1.If an asset’s beta is 0.8, the expected return on the equity market is 10.0 percent, and the appropriate discount rate for the Gordon model is 9.0 percent, what is the risk-free rate?

A)   2.50%.

B)   5.00%.

C)   6.50%.

D)   7.25%.

The correct answer was B)

Required return = risk-free rate + beta (expected equity market return – risk-free rate)
9% = risk-free rate + 0.8(0.10 – risk-free rate)
9% = 0.08 + 0.2(risk-free rate)
1% / 0.2 = risk-free rate = 0.05 or 5%

2.In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset’s beta is used to determine the amount of:

A)   risk-free rate applicable to the time period of the investment.

B)   equity premium.

C)   future cash flow expected from the firm.

D)   the expected return in addition to the return required by the risk of the position.

The correct answer was B)

Beta measures the correlation between the equity market or index for which the market risk premium is calculated and the particular asset being valued. Beta is used to approximate the proportion of the equity risk premium applicable to the asset (in relation to the market or index used).

3.If the risk-free rate is 6 percent, the equity premium of the chosen index is 4 percent, and the asset’s beta is 0.8, what is the discount rate to be used in applying the dividend discount model?

A)   10.80%.

B)   8.00%.

C)   7.80%.

D)   9.20%.

The correct answer was D)

The discount rate = risk-free rate + beta (return expected on equity market less the risk-free rate). Here, discount rate = 0.06 + (0.8 x 0.04) = 0.092, or 9.2%.

4.Which of the following is NOT a valid approach to determining the appropriate discount rate for a firm’s dividends?

A)   Capital asset pricing model (CAPM).

B)   Free cash flow to firm (FCFF).

C)   Asset pricing theory (APT).

D)   Bond yield plus equity risk premium.

The correct answer was B)

FCFF is another discounted cash flow model, not a method to determine required returns. Each of the other answers is a valid approach to determining an appropriate discount rate.