Question

SECTION A Answer any TEN questions in this section. Each question carries THE State 'true' or 'false', and briefly explain your answer. 1. All valuations are subjective. Answer any FOUR marks 2 The CAPM is untestable. 3. A firm with highly volatile cash flows can have low beta 4. A retailer's earnings show a strong seasonal pattern and hence its stock price will also demonstrate seasonality 5. Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) approaches produce different equity valuations 6. Depreciation equals capital expenditure in steady state. 7. Growth in earnings can be lower than the growth in earnings per share. 8. The Price to EBITDA ratio should not be used for relative valuation 9. For a firm in steady state, other things being equal, higher growth rate implies higher Price-to-Book ratio 10. The free cash flow to equity will always be higher than the net income. 11. Insteady state the payout ratio grows at the steady state growth rate. 12. Value of the option to delay a project is higher when there is more uncertainty about the project Page 2 of 8

Answer 1

1. TRUE - there are always assumptions for certain variables before we arrive at an answer

2. FALSE - It has been used over so many years to successfully predict financial models and arrive at valuations

3. FALSE - Beta is the measure of volatility - higher the uncertainty of cash flows, higher the Risk and hence higher BETA

4. FALSE - If the company has potential in the business, it should not reflect on its price

5. TRUE - Free Cash Flow to Firm is the total Cash available including cash for distribution of dividend (Free Cash Flow to Equity)

6. FALSE - Depreciation is a periodic charge against the Capex, hence cannot be equal to Capex

7. TRUE - In case the Company has Share Buy Back transaction

8. TRUE - EBIDTA per share should be better measure

9. FALSE - Higher growth implies higher Profits (PAT) leading to higher Book Value. All other factors being constant (i.e., including Market price) Price to Book Value will come down, hence statememt in FALSE

10. TRUE - Free Cash FLow to Equity (FCFE) is a portion of net Income which is available for distribution to equity owners, hence FCFE will always be lower than Net Income

11. TRUE - Payout Ratio is the ration of Dividend vs. Share Price. If growth rate is steady, the ratio will also be steady

12. TRUE - Higher uncertainty leads to higher flexibility thereby leading to better value of Option