Question

1. The_____ is based on the concept that the earnings generated by a company must be sufficient to compensate investors who provide its funds.

a. Dividend discount model (DDM)

b. Economic value added (EVA)

c. Constant growth model

d. P/E ratio

2. Which of the following is true about the call provision?

a. Call provisions state that the company must pay an amount greater than the par value of the preferred stock.

b. Call provisions provide an option to convert each share of the preferred stock into a certain number of shares of common stock.

c. Call provisions will allow the transfer of right to vote to a second party by means of an instrument.

d. Call provisions will allow the stockholders to elect the members of the board of directors and vote on corporate issues.

3. A firm has an EBIT of $30 million, a total invested capital of $104 million, and an average cost of funds of 15%. The firm has a marginal tax rate of 40% and 8.5 million shares of the firm are outstanding. What is the EVA of the firm?

a. 3.78 million

b. 4.94 million

c. 2.40 million

d. 4.25 million

Answer 1

1. The_____ is based on the concept that the earnings generated by a company must be sufficient to compensate investors who provide its funds.

b. Economic value added (EVA)

2. Which of the following is true about the call provision?

b. Call provisions provide an option to convert each share of the preferred stock into a certain number of shares of common stock.

3. A firm has an EBIT of $30 million, a total invested capital of $104 million, and an average cost of funds of 15%. The firm has a marginal tax rate of 40% and 8.5 million shares of the firm are outstanding. What is the EVA of the firm?

c. 2.40 million

NOPAT=30*(1-40%)=18
EVA=18-104*15%=2.4 million