Question

1) Which of the following adjustments would you make after calculating the value of the firm to get to the value of equity?

A) Subtract the value of debt

B) Subtract the expected liabilities form any lawsuits

C) Subtract capital expenditures on new projects

D) Subtract any unfunded pension and health care obligations

2) The value of the firm when using dividends as the cash flow will often be different from the value using FCFE as the cash flows. Which of the following statements is correct concerning the two different estimates?

A) If the firm is large and there are significant barriers to a takeover using FCFE is the more appropriate approach

B) If FCFE is greater than dividends and projects are earnings high returns it is likely the dividend model will provide a higher value.

C) If there is a significant change that the firm can be taken over and the management changed, the market price will reflect that possibility and using FCFE is more appropriate.

D) If FCFE is less than dividends there will be a cash surplus and the valuation depends upon the quality of project undertaken by the firm.

3) Which of the following is no commonly used in discounted cash flow valuation to calculate the value of the firm

A) Free Cash Flow to the Firm

B) Dividends

C) Share Buy Backs

D) Free Cash Flow to Equity

Answer 1

1. A) Subtract the value of debt

Value of firm = Value of equity + value of debt

2. B) If FCFE is greater than dividends and projects are earnings high returns it is likely the dividend model will provide a higher value.

Since the growth rate will be higher

3. C) Share Buy Backs

Rest 3 are used to calculate value