Question

-__________________ is driven by fundamentals, i.e. cash flow, growth and risk while ______________ is built upon comparing an asset to what investor are paying for similar assets in public markets or M&A transactions.

1)	Intrinsic value; Contingent value

2)	Intrinsic value; Relative value

3)	Relative value; Intrinsic value

4)	Relative value; Contingent value

-You are seeking to determine the cost of equity for a publicly traded company and are given the following information: Risk free rate of 5.0%, Beta of 1.10x, equity risk premium of 4.0%. What is the cost of equity?

	9.0%
	9.4%
	9.5%
	9.9%

-Gazmotron International reported net income this past year of $420 million on book value of $2,950. The company paid out $200 million in dividends.

Using the above information, what was the return on equity (ROE) and the retention ratio?

	ROE = 6.8%, Retention ratio = 52.4%
	ROE = 6.8%, Retention ratio = 47.6%
	ROE = 14,2%, Retention ratio = 52.4%
	ROE = 14,2%, Retention ratio = 47.6%

Answer 1

1.

Intrinsic value is driven by fundamentals, i.e. cash flow, growth and risk while Relative value is built upon comparing an asset to what investor are paying for similar assets in public markets or M&A transactions.

Option (2) is correct answer.

2.

Cost of equity = Risk free rate + (Risk premium × Beta)

= 5% + (4% × 1.10)

= 5% + 4.40%

= 9.40%

Cost of equity is 9.40%.

Option ((B) is correct answer.

3.

Return on equity = Net Income / Book Value of equity

= $420 / $2,950

= 14.24%.

Return on equity is 14.24%.

Dividend paid = $200 million.

Retention ratio = ($420 - $200) / $420

= 52.40%

Retention ratio is 52.40%.

Hence, ROE = 14,2%, Retention ratio = 52.4%

Option (C) is correct answer.