Question

These statements are true of false? Explain.

1) In DCF valuation, a company can increase its return on equity
(ROE) by increasing

its leverage ratio if and only if its return on capital (ROC)
exceeds its after-tax cost of

debt (rd x (1 - Tc)). (Assume all other inputs are fixed.)

2) In the context of the dividend discount model (DDM), a
company can always increase

its intrinsic equity value by increasing its dividend payout ratio
if and only if ROE < re.

(Assume all other inputs are fixed.)

3) After-tax interest expenditures are included in the
calculation of free cash flow

to the firm (FCFF).

4) Cash dividends and share repurchases (buy-backs) are
irrelevant for the calculation

of free cash ow to equity (FCFE).

Answer #1

1)

TRUE

2) In the context of the dividend discount model (DDM), a
company can always increase

its intrinsic equity value by increasing its dividend payout ratio
if and only if ROE < re.

(Assume all other inputs are fixed.)

TRUE

3) After-tax interest expenditures are included in the
calculation of free cash flow

to the firm (FCFF).

FALSE

4) Cash dividends and share repurchases (buy-backs) are
irrelevant for the calculation

of free cash ow to equity (FCFE).

FALSE

True or false.
In DCF valuation, a company can increase its equity value by
borrowing more money provided that the after-tax cost of debt
exceeds the return on capital. (Assume all other inputs are
fixed.

A firm with good investments and SCD/FCFE ratio greater than 1
should:
I. Reduce cash distributions
II. Increase investments
III. Build cash reserves
Select one:
A. I only
B. II only
C. III only
D. I and II only
E. II and III only
F. I, II, and III
If the firm's SCD/FCFE ratio is greater than 1, the firm
is:
I. Paying out all of its free cash flow available to the common
shareholders
II. Increasing its holdings of...

Suppose that Rose Industries is considering the acquisition of
another firm in its industry for $100 million. The acquisition is
expected to increase Rose's free cash flow by $5 million the firs
year, and this contribution is expected to grow at a rate of 3%
every year there after. Rose currently maintains a debt to equity
ratio of 1, its marginal tax rate is 40%, its cost of debt rD is
6%, and its cost of equity rE is 10%....

Suppose that Ret is considering the acquisition of another firm
in its industry for $100 million. The acquisition is expected to
increase Ret’s free cash flow by $5 million the first year, and
this contribution is expected to grow at a rate of 3% every year
thereafter. Ret currently maintains a debt to equity ratio of 1,
its corporate tax rate is 21%, its cost of debt rD is 6%, and its
cost of equity rE is 10%. Ret will...

A company can increase its free cash flows by ________. none of
these choices are correct increasing its effective tax rate
decreasing the amount of net operating profit after tax increasing
investments in receivables, inventories, and fixed assets
decreasing investments in receivables, inventories, and fixed
assets
none of these choices are correct
increasing its effective tax rate
decreasing the amount of net operating profit after tax
increasing investments in receivables, inventories, and fixed
assets
decreasing investments in receivables, inventories, and...

1)what are the correct statements.
Group of answer choice:
a)If a security is underpriced, then the expected holding period
return is above the market capitalization rate.
b)The value of the equity equals the present value of all future
payouts (dividends plus repurchases).
c)The value of a share equals the present value of all future
dividends per share.
d)If a firm reinvests its earnings at an ROE equal to the market
capitalization rate, then its earnings-price (E/P) ratio is equal
to...

Coca-Cola Corp. needs to purchase new plastic moulding machines
to meet the demand for its product. The cost of the equipment is
$3,028,000. It is estimated that the firm will increase after tax
cash flow (ATCF) by $611,671 annually for the next 5 years. The
firm is financed with 40% debt and 60% equity, both based on
current market values, though the firm has announced that it wants
to quickly change its debt to equity ratio to 1.5. The firm's...

TRUE/FALSE
Simply calculating the various ratios tells everything you need
to know about a company.
You would expect a produce market to have a low inventory
turnover ratio.
The Acid Test Ratio uses only the most liquid current assets in
its calculation.
The Current Ratio uses only the most liquid current assets in
its calculation.
The Inventory Turnover Ratio indicates the number of times
Accounts Receivable are turned into cash during the period.
The Return on Sales Ratio indicates how...

. Indicate whether the following statements are true or false:
(1 point each for a total of 12 points)
(a): Financial decisions have to do with allocating capital,and
affect the assets side of the balance sheet of the firm.
(b): Real Assets are those assets of the firm that are needed
for its operations and play a role in generating income for the
firm.
(c): Capital markets are said to be efficient if market prices
reflect all available information.
(d):...

Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately 0.23. Its current stock price is
$53 per share, with 2.9 billion shares outstanding. The firm
enjoys very stable demand for its products, and consequently it
has a low equity beta of 0.575 and can borrow at 3.7% just 20 basis
points over the risk-free rate of 3.5%.The expected return of the
market is10.1%, and PKGR's tax rate is 35%
a. This year, PKGR is expected to have...

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