The magnitude of a company\'s value-to-book ratio depends heavily on its A. expe
ID: 2768405 • Letter: T
Question
The magnitude of a company's value-to-book ratio depends heavily on its
A. expected book equity growth B. Profit margins C. sales turnover D. none of the above
Companies can grow their equity base by (chose all that apply)
A. taking out new long term debt B. issuing new stock C. taking on additional short term debt D. reinvesting profits
Valuation under the Discounted Cash Flow method involves
A. Forecasting free cash flows available to equity holders over a finite forecast horizon
B. Forecasting free cash flows beyond the terminal year based on some simplified assumptions
C. Discounting free cash flows to equity holders at the cost of equity
D. All of the above
Which of the following are advantages of defining values in terms of ROE's (choose all that apply)
A. It uses the same key measures of performance that are decomposed in a standard financial analysis
B. ROE's are much easier to calculate than other performance measurements
C. It enhances the analyst's ability to evaluate the reasonableness of their forecasts by benchmarking them with REO's of other companies in the industry
D. All of the above
Explanation / Answer
1.
The magnitude of a company's value-to-book ratio depends heavily on its Profit margins because if profit increase then value of retained earnings also increases and so book value of equity also increases.
Hence, option (B) is correct answer.
2.
Companies can grow their equity base by taking out new long term debt and reinvesting profits.
Hence, option (A) and option (D) is correct answer.
3.
Valuation under the Discounted Cash Flow method involves various assumption which is mention below:
1. Forecasting free cash flows available to equity holders over a finite forecast horizon
2. Forecasting free cash flows beyond the terminal year based on some simplified assumptions
3. Discounting free cash flows to equity holders at the cost of equity
All the given option is correct regarding discounted cash flow method.
Hence, option (D) is correct answer.
4.
Advantages of defining values in terms of ROE's is mention below:
1. It uses the same key measures of performance that are decomposed in a standard financial analysis
2. ROE's are much easier to calculate than other performance measurements
3. It enhances the analyst's ability to evaluate the reasonableness of their forecasts by benchmarking them with REO's of other companies in the industry
All the given option is correct regarding return on equity analysis.
Hence, option (D) is correct answer.
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