Equity Valuation【 Reading 34】Sample 2012

bapswarrior

How can we account for different valuations for the same firm from several analysts even if they use the same required returns?

A) Valuations are based on the analyst's expectations.

B) The analysts may be biased with personal opinions about management.

C) Valuation models contain random errors.

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Valuation is based on expectations of future cash flows rather than known values. Each analyst will build expectations of cash flows from the fundamental data and from other factors, internal and external, that the analyst believes will affect the firm’s performance.

bapswarrior

Valuation models for equities contain estimates of required returns and:

A) an assumed continuation of past cash flows.

B) expected future cash flows.

C) known future cash flows.

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Valuation models used for equities require the analyst to estimate the required return applicable to the investment and to develop an expectation of future cash flows. While cash flows for fixed-income investments are stated, no such definition is available for equities.

bapswarrior

The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an asset’s:

A) relative value.

B) intrinsic value.

C) market value.

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Asset valuation based on the expected future cash flows is utilized to estimate an asset’s intrinsic value, or the value derived from the asset's investment characteristics.

bapswarrior

A wise analyst will examine a valuation to determine:

A) ways to enhance a client's valuation.

B) its sensitivity to changes in expectations.

C) how well it will be received by the firm's management.

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The results of valuation models can be very sensitive to changes in the expectations incorporated in the model. Analysis of a valuation’s sensitivity to the expectations and a review of the confidence the analyst has in the expectations may lead to the use of a valuation range rather than a pin-point value.

bapswarrior

A valuation of a firm based on the current market price of its assets - liabilities is referred to as the firm’s:

A) going-concern value.

B) liquidation value.

C) operating value.

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The liquidation value is based on the assumption that the firm will cease to operate and all of its assets will be sold to repay liabilities.

bapswarrior

Liquidation value is the:

A) market value of the total assets less the market value of the total liabilities.

B) cash generated by terminating a business, selling its assets, and repaying liabilities.

C) present value of future cash flow less the possible liquidation cost.

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Liquidation value is the cash generated by terminating a business, selling all of its assets, and repaying liabilities.

bapswarrior

A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:

A) equal to the present value of the expected continued operation of the firm.

B) greater than the liquidation value.

C) less than the liquidation value.

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It is not possible to state the relationship between the going-concern value and the liquidation value without examining the prospects for the firm and the current value of the assets. The going-concern value is equal to the present value of the expected dividends arising from continued operation

bapswarrior

A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

A) operating value.

B) status quo value.

C) going-concern value.

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The going-concern value is based on the assumption that the firm will continue to operate and the firm’s value is the present value of its future dividends

bapswarrior

The present value of expected future cash flows is the firm's:

A) going-concern value.

B) terminal value.

C) liquidation value.

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Going-concern value is the present worth of expected future cash flows generated by a business.

bapswarrior

Which of the following is NOT a use of asset valuation?

A) Estimating inflation rates.

B) Projecting the value of corporate actions.

C) Issuing fairness opinions.

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Asset valuation has many uses including stock selection, reading the market, projecting the value of corporate actions, issuing fairness opinions, and valuing private businesses. Asset valuation is not used to project inflation rates.