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Q9. Davidson determines that over the past three years, Samson has maintained an average net profit margin of 8 percent, a total asset turnover of 1.6, and a leverage ratio (equity multiplier) of 1.39. Assuming Samson continues to distribute 35 percent of its earnings as dividends, Samson’s estimated sustainable growth rate (SGR) is:
A) 11.6%.
B) 17.8%.
C) 6.2%.
Q10. If an investor had determined that an asset’s market price was too high, (implying that it will soon fall) the expected holding period return (HPR) would be:
A) equal to the required return.
B) higher than the required return.
C) lower than the required return.
Q11. The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:
A) inflation alters the value of the past returns.
B) the past is rarely an indication of the future.
C) equity premiums vary over time with perceived risk.
Q12. The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):
A) has little practical effect because they are both very close.
B) limits its usefulness in estimating the required return of an asset.
C) was settled by the work of Harry Markowitz in 1972.
Q13. One of the limitations of the dividend discount models (DDMs) is that:
A) they are conceptually difficult.
B) they are very sensitive to growth and required return assumptions.
C) given the inputs, they are not very precise in their valuations.
Q14. Which of the following is least likely a potential problem associated with the three-stage dividend discount model (DDM)? The:
A) beta in the stable period is too high, resulting in an extremely low stock value.
B) high-growth and transitional periods are too long, resulting in an extremely high stock value.
C) stable period payout ratio may be too high resulting in an extremely low value.
Q15. Multi-stage dividend discount models can be used to estimate the value of shares:
A) only when the growth rate exceeds the required rate of return.
B) only under a limited number of scenarios.
C) under an almost infinite variety of scenarios.
Q16. The H model will NOT be very useful when:
A) a firm has a constant payout policy.
B) a firm is growing rapidly.
C) a firm has low or no dividends currently.
A) growth rate in the stable growth period is lower than that of gross national product (GNP).
B) transition period is too short.
C) growth rate in the stable growth period is probably too high.
Q18. The H-model is more flexible than the two-stage dividend discount model (DDM) because:
A) payout ratio changes to adjust the changes in growth estimates.
B) terminal value is not sensitive to the estimates of growth rates.
C) initial high growth rate declines linearly to the level of stable growth rate.
Q19. Which of the following dividend discount models has the limitation that a sudden decrease to the lower growth rate in the second stage may NOT be realistic?
A) Two-stage dividend discount model.
B) Gordon growth model.
C) H model.
Q20. Free cash flow to equity models (FCFE) are most appropriate when estimating the value of the firm:
A) to equity holders.
B) to creditors of the firm.
C) only for non-dividend paying firms.
Q21. Flyaweight Foods is a vertically integrated producer and distributor of low-calorie food products operating on a consumer club model. They have enjoyed rapid growth in the southwest United States during their 5-year history and are planning rapid expansion throughout the rest of the country. To fund their expansion, they are soliciting investments from a variety of venture capital groups.
One of the groups considering a bid for Flyaweight is Angelcap Investors, a private equity fund run by Harry Moskowitz. Angelcap is interested in acquiring a 10% interest in Flyaweight. Moskowitz’ partner, Bill Sharpless, runs the group doing due diligence on Flyaweight. He provides Moskowitz with financial data on the firm:
Table 1: Flyaweight Foods Historical Data
(Dollars per share)
|
|
FY1 |
FY2 |
FY3 |
FY4 |
FY5 |
|
Sales per share |
4.25 |
5.60 |
6.40 |
7.35 |
8.05 |
|
EPS |
1.20 |
1.85 |
2.30 |
2.79 |
3.10 |
|
Dividends |
0 |
0 |
0.10 |
0.20 |
0.35 |
|
Free Cash Flow |
-2.50 |
-2.10 |
-1.85 |
-1.60 |
-1.25 |
Moskowitz suggests that a Dividend Discount Model (DDM) would be an appropriate means for valuing Flyaweight because Angelcap would be a minority shareholder. Sharpless points out that the primary advantage of using a DDM is that dividends are more stable than earnings or cash flow.
They ask Merle Muller, an analyst at the firm, to calculate an appropriate required return on Flyaweight. Muller collects the following market consensus information:
Table 2: Current Market Conditions
(Consensus estimates)
|
Expected 5-year EPS growth |
8.0% |
|
Expected 1-year Dividend yield |
2.2% |
|
Current Treasury yield (10-year note) |
4.8% |
|
Food industry beta (specialty segment) |
0.95 |
Muller says, “If we assume that the beta for Flyaweight should equal the beta of the specialty food industry, then our required rate of return in less than 10%.” Moskowitz disagrees strongly with using a discount rate that low and insists on using a multi-factor model such as the Arbitrage Pricing Theory (APT) instead. Sharpless disagrees that the APT will solve the estimation problem, pointing out, “A principal limitation of both the Capital Asset Pricing Model (CAPM) and the APT is uncertainty about the correct measurement of the market and factor risk premiums.”
Sharpless argues in favor of using the Gordon Growth Model (GGM). “We know what the company growth rate is, we know what the dividend is, and we can decide what our required rate of return is. The GGM will give us the most accurate valuation because it uses the inputs we can measure most accurately.” Moskowitz points out, “An H-model would be more appropriate because it assumes a linear slowdown in growth to a constant rate in perpetuity.”
While Sharpless and Moskowitz debate the appropriate valuation approach, Muller prepares forecasts for Flyaweight.
Table 3: Forecast Values for Flyaweight
|
< >> |
Forecast |
|
Average total liabilities per share |
$14.40 |
|
Average owners’ equity per share |
$12.70 |
|
Profit margin |
29% |
|
Sales per share |
$10.70 |
|
Dividend payout ratio |
10% |
Judging by the data in Table 1, the most appropriate method for valuing Flyaweight would be:
A) residual income because the firm is likely to have high capital demands and negative cash flow for the foreseeable future.
B) justified P/E because it is a high-growth company.
C) the DDM because the firm has a history of dividend growth. | 
发表于 2009-3-6 15:33
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