Question

1. Which one of the following factors is not considered in calculating the firm’s cost of equity?

1. risk free rate of return
2. beta
3. interest rate on corporate debt
4. expected return on equities
5. difference between expected return on stocks and the risk free rate of return

Which one of the following factors is not considered in calculating the firm’s cost of capital?

1. cost of equity
2. interest rate on debt
3. the firm’s marginal tax rate
4. book value of debt and equity
5. the firm’s target debt to equity ratio

A firm’s leveraged beta reflects all of the following except for

1. unleveraged beta
2. the firm’s debt
3. marginal tax rate
4. the firm’s cost of equity
5. the firm’s equity

1. Which of the following factors is excluded from the calculation of free cash flow to the firm?

1. Principal repayments
2. Operating income
3. Depreciation
4. The change in working capital
5. Gross plant and equipment spending

1. Which of the following is not true about the constant growth valuation model?

1. The firm’s free cash flow is assumed to be unchanged in perpetuity
2. The firm’s free cash flow is assumed to grow at a constant rate in perpetuity
3. Free cash flow is discounted by the difference between the appropriate discount rate and the expected growth rate of cash flow.
4. The constant growth model is sometimes referred to as the Gordon Growth Model.
5. If the analyst were using free cash flow to the firm, cash flow would be discounted by the firm’s cost of capital less the expected growth rate in cash flow.

Answer 1

1.
interest rate on corporate debt

2.
book value of debt and equity

3.
the firm’s cost of equity

4.
Depreciation

5.
The firm’s free cash flow is assumed to be unchanged in perpetuity