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Q22. Regarding their statements about calculating a required rate of return for Flyaweight: ffice ffice" />
A) only Muller is correct.
B) only Sharpless is correct.
C) both are correct.
Correct answer is C)
Sharpless is correct that uncertainty surrounding estimates of inputs and risk premiums is a key limitation of both the CAPM and the APT. Muller is correct that the required rate of return on Flyaweight is less than 10% if the beta of the specialty foods industry is used:
Equity risk premium:
one-year dividend growth + long-term EPS growth ? long-term risk free rate
Equity risk premium = 2.2% + 8.0% – 4.8% = 5.4%
Thus the required rate of return is:
Required rate of return = Risk free rate + (beta × market risk premium)
Required rate of return = 4.8% + (0.95 × 5.4)
Required rate of return = 9.9%
(Study Session 10, LOS 36.b, c, d)
Q23. With respect to their statements about the use of the GGM and the H-model:
A) both are correct.
B) only Moskowitz is correct.
C) only Sharpless is correct.
Correct answer is B)
Moskowitz is correct that an H-model assumes a linear slowdown in growth until a constant growth rate is achieved. Sharpless is incorrect that the GGM would be an appropriate technique for valuing Flyaweight because the GGM assumes a constant rate of growth in perpetuity and Flyaweight has not yet reached a constant growth rate. (Study Session 11, LOS 41.i)
Q24. Which of the following is least likely to be a characteristic of a company in the initial growth phase?
A) Return on equity equal to the required rate of return.
B) Low dividend payout ratio.
C) High profit margin.
Correct answer is A)
Companies in the initial growth phase tend to have a return on equity higher than the required rate of return, along with high profit margins and a low dividend payout. (Study Session 11, LOS 41.k)
Q25. With respect to their statements about the use of DDMs:
A) only Moskowitz is correct.
B) only Sharpless is correct.
C) both are correct.
Correct answer is A)
Moskowitz’ statement is correct. A dividend discount approach is most appropriate when the perspective is that of a minority shareholder. Sharpless’ statement is incorrect because the primary advantage of a DDM is that it is theoretically justified. The stability of dividends is an additional advantage. (Study Session 11, LOS 41.a)
Q26. Based on the forecast data in Table 3, Flyaweight’s sustainable growth rate (SGR) is closest to which value? If asset turnover were to rise from the forecast level, what would be the impact on SGR?
SGR Impact on SGR
A) 22% Increase
B) 24% Increase
C) 22% Decline
Correct answer is A)
Note that total assets for the firm must equal total liabilities plus owners’ equity, so assets are ($14.40 + $12.70) = $27.10.
Thus the Return on Equity (ROE) of the firm equals:
ROE = profit margin × asset turnover × financial leverage
ROE = (0.29) × ($10.70 / $27.10) × ($27.10 / $12.70)
ROE = 0.244 = 24.4%
ROE will rise as asset turnover rises.
The SGR of the firm equals:
SGR = retention rate × ROE
SGR = (1 – 0.10) × 0.244
SGR = 0.90 × 0.244
SGR = 0.22
The SGR of the firm is approximately 22%.
SGR will increase as rising asset turnover increases ROE.
(Study Session 11, LOS 41.o)
Q27. If an asset was fairly priced from an investor’s point of view, the holding period return (HPR) would be:
A) equal to the alpha returns.
B) lower than the required return.
C) the same as the required return.
Correct answer is C)
A fairly priced asset would be one that has an expected HPR just equal to the investor’s required return.
Q28. If an investor were attempting to capture an asset’s alpha returns, the expected holding period return (HPR) would be:
A) lower than the required return.
B) higher than the required return.
C) the same as the required return.
Correct answer is B)
Alpha returns are returns in addition to the required returns, so the expected HPR would be higher than the required return.
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发表于 2009-3-6 15:35
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