Corporate Finance
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Course Introduction
Corporate Finance explores the principles and techniques essential to financial management in corporations. The course covers topics such as capital budgeting, risk analysis, cost of capital, capital structure decisions, dividend policy, and financial planning. Students will learn how firms acquire, allocate, and control funds to maximize value for shareholders, with a strong emphasis on analytical tools and practical decision-making. Real-world case studies and problem-solving exercises are used to build a foundational understanding of corporate financial strategy and its impact on business growth and sustainability.
Recommended Textbook
Valuation Measuring and Managing the Value of Companies 6th Edition by McKinsey
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Page 2
Chapter 1: Why Value Value
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Q1) The conservation of value corollary of the value-creation principle says that:
A)Reducing costs is the first step in creating value.
B)Return on invested capital must increase over time to create value.
C)Anything that does not increase cash flows does not create value.
D)Acquisitions always create more value than divestitures.
Answer: C
Q2) Data from Europe and the United States found that the correlation between value creation and employment in the company has been:
A)Positive.
B)Negative.
C)Essentially zero.
Answer: A
Q3) The faster companies can increase their revenues and deploy more capital at attractive rates of return,the more value they create.
A)True
B)False
Answer: True
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Chapter 2: Fundamental Principles of Value Creation
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Q1) If the growth rate of a company is 2.1 percent and the ROIC is 9 percent,what is the investment rate?
A)23.3 percent.
B)30.4 percent.
C)45.5 percent.
D)69.6 percent.
Answer: A
Q2) Companies can increase their value by shifting the listing country,as demonstrated by the fact that U.S.companies have had higher valuation multiples than companies based in Asia.
A)True
B)False
Answer: False
Q3) Organic growth often creates more value than growth from acquisitions.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Conservation of Value and the Role of Risk
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Q1) Which of the following is NOT true concerning application of the conservation of value principle to acquisitions?
A)An acquisition will create value if it increases cash flows sufficiently by reducing costs.
B)An acquisition will create value if it increases cash flows sufficiently by increasing revenue growth.
C)An acquisition will create value if it increases cash flows sufficiently by improving the use of fixed or working capital.
D)An acquisition will create value if it grows revenues.
Answer: D
Q2) Managers should hedge risks in their core business,as this helps eliminate some risk to investors without any reduction in returns.
A)True
B)False
Answer: False
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Chapter 4: The Alchemy of Stock Market Performance
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Q1) Total returns to shareholders (TRS )equal dividends plus share repurchases.
A)True
B)False
Q2) List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.
Q3) What was the expected return on the investment as on January 1,2014?
A)110 percent.
B)10 percent.
C)20 percent.
Q4) What is the TRS?
A)7.0 percent.
B)3.0 percent.
C)4.4 percent.
D)14.4 percent.
Q5) Total returns to shareholders is closest to:
A)8.0 percent.
B)9.5 percent.
C)11.1 percent.
D)15.5 percent.
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Chapter 5: The Stock Market Is Smarter Than You Think
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Q1) Over the past five years,the highest share price for Techno Inc. ,a 15-year-old software company,was around $750,and its lowest price was around $250,while for ConsumerCo,a consumer products firm with a 50-year history,share prices ranged from $85 down to $60 over the same period.Which of the following are the most likely reasons for these stock market reactions?
I.The stock market is reflecting emotions more than fundamentals. II.Swings in prices reflect changes in expectations of Techno Inc.
III.The range in expectations for Techno Inc.is likely greater than for ConsumerCo.
A)I only.
B)I and III.
C)II and III.
D)I,II,and III.
Q2) Empirical research shows that goodwill impairments have no impact on a company's share price at the time of the impairment.
A)True
B)False
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Chapter 6: Return on Invested Capital
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Q1) A firm's additional costs for producing each additional unit of its product are essentially zero.The best term for describing the firm's product is that it is:
A)A Giffen good.
B)A normal good.
C)A scalable product.
D)An inferior good.
Q2) Competitive advantages based on brands,as in the consumer goods industry,are often more important for long-term value creation than advantages based on product quality or innovation.
A)True
B)False
Q3) Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar rate.
A)True
B)False
Q4) Historically,the rates of growth of firms tend to be more stable than their ROICs.
A)True
B)False
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Chapter 7: Growth
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Q1) For firms that grew at rates less than 5 percent in the 2000-2003 period,what percentage grew at rates greater than 10 percent in the 2010-2013 period?
A)44 percent.
B)15 percent.
C)13 percent.
D)28 percent.
Q2) For which situation does additional growth likely create more value?
A)High-ROIC company in a mature market.
B)Low-ROIC company in a fast-growing market.
C)Low-ROIC company in a mature market.
D)Medium-ROIC company in a mature market.
Q3) The strategy of making bolt-on acquisitions to accelerate product sales:
A)Has not been proven to create value.
B)Can create positive and about average value compared to other strategies.
C)Can create positive and above-average value compared to other strategies.
D)Can create positive but below-average value compared to other strategies.
Q4) Incremental innovation will rarely create lasting value.
A)True
B)False
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Chapter 8: Frameworks for Valuation
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Q1) A firm is financed with 62 percent debt and 38 percent equity.The pretax costs of debt and equity capital are 6.6 percent and 11.3 percent,respectively.What is the tax rate if the WACC is 7 percent?
A)31 percent.
B)34 percent.
C)37 percent.
D)64 percent.
Q2) Which of the following is best to use when valuing a financial institution?
A)Enterprise discounted cash flow model.
B)Adjusted present value (APV).
C)Equity cash flow model.
D)Capital cash flow model.
Q3) When valuing a parent company that owns less than 100 percent of a subsidiary,the minority interest holder of the subsidiary has a claim on the company's assets.
A)True
B)False
Q4) Operating leases represent the most common form of off-balance-sheet debt.
A)True
B)False
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Chapter 9: Reorganizing the Financial Statements
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Q1) To measure a company's ability to create value after paying acquisition premiums,which of the following adjustments should be made?
I.Adjust reported goodwill upward to recapture historical amortization and impairments.
II.Adjust acquired intangibles upward to recapture historical amortization and impairments.
III.Add the hypothetical accrued interest of the notional goodwill principle.
A)I and II only.
B)II and III only.
C)I and III only.
D)I,II,and III only.
Q2) What are Dolphin's NOPLAT and ROIC for the current year,using average invested capital?
A)$82,13.6 percent.
B)$108.9,18.1 percent.
C)$92,15.4 percent.
D)$85,14.1 percent.
Q3) Pension assets are considered an operating asset and part of invested capital.
A)True
B)False
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Page 11
Chapter 10: Analyzing Performance
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Q1) Which of the following is the best method of determining whether the financial performance between competitors is sustainable?
A)Linking operating drivers directly to return on capital.
B)Comparing the respective ROE and ROA measures.
C)Breaking ROE down into ROIC,tax,interest rate,and leverage effects.
D)Distinguishing between pretax ROIC and the operating-cash tax rate.
Q2) ROIC excluding goodwill is useful when measuring underlying operating performance of the company and its businesses,and it is useful for comparing performance against peers and to analyze trends.
A)True
B)False
Q3) Using the preceding table,if receivables,inventories,and other current assets are $520 in 2015,then what is the number of days in cash?
A)28 days.
B)29 days.
C)30 days.
D)31 days.
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Chapter 11: Forecasting Performance
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Q1) Which of the following is NOT one of the steps in the forecast of individual line items related to the income statement?
A)Determine the economic relationships that drive the model.
B)Model the business cycle.
C)Estimate the forecast ratios.
D)Forecast the drivers and multiply times the respective ratios.
Q2) Changing the dividend payout ratio will change the value of the firm and the firm's equity.
A)True
B)False
Q3) The recommended approach for forecasting cash flows of a parent company arising from investments in subsidiaries where the parent owns less than 20 percent of the subsidiary is to use the relationship between income from these subsidiaries and overall firm revenues.
A)True
B)False
Q4) List the three steps in making a top-down forecast of revenue and the three inputs for making a bottom-up forecast of revenue.
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Chapter 12: Estimating Continuing Value
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Q1) If NOPLATt?? = $200,g = 4%,RONIC = 10%,WACC = 8%,then continuing value in year t is closest to:
A)$667
B)$1,333
C)$3,000
D)$5,000
Q2) The estimate of continuing value after the explicit forecast period cannot be higher than the total value of the firm.
A)True
B)False
Q3) The value of a company's operations equals the sum of all of the following EXCEPT: A)Invested capital.
B)The market value of nonoperating assets.
C)The present value of economic profit from continuing value.
D)The present value of economic profit of the explicit forecast period.
Q4) Describe the best estimate to use for a company's growth rate in the steady state and why it is the best.
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14
Chapter 13: Estimating the Cost of Capital
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Q1) Which of the following most accurately describes the types of companies where the yield to maturity on outstanding bonds is an appropriate proxy for the cost of debt?
A)All companies with outstanding bonds.
B)Only companies whose bonds are rated investment grade.
C)All companies whose bonds are rated investment grade or below investment grade but not in default.
D)The yield to maturity is not an appropriate proxy for the cost of debt for any company because of the reinvestment rate assumption.
Q2) A firm has 4,000,000 shares of stock outstanding with a price per share equal to $22.There are 200,000 bonds outstanding each priced at $995 each.The cost of equity is 14 percent,the cost of debt is 8 percent,and the corporate tax rate is 34 percent.What is the WACC?
A)10.3 percent.
B)9.8 percent.
C)8.0 percent.
D)8.8 percent.
Q3) Briefly explain the two methods of estimating market returns.
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Page 15
Chapter 14: Moving From Enterprise Value to Value Per Share
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Q1) Company X controls Company Y so that Company Y's financial statements are fully consolidated in the group accounts.With respect to Company X's financial statements,third-party stakes in Company Y:
A)Are not of concern.
B)Are to be deducted and are called noncontrolling interest.
C)Are to be added in and are called noncontrolling interest.
D)Are illegal.
Q2) An analyst is applying an integrated-scenario approach to evaluate operations as well as equity,and the analyst essentially treats equity as a call option on the enterprise value.It is most likely the analysis is of a company that:
A)Is highly levered.
B)Has securitized receivables.
C)Uses income smoothing.
D)Has excess pension assets or liabilities.
Q3) In evaluating employee stock options,the exercise value approach provides:
A)A lower bound of valuation,and using it can undervalue the firm.
B)An upper bound of valuation,and using it can undervalue the firm.
C)A lower bound of valuation,and using it can overvalue the firm.
D)An upper bound of valuation,and using it can overvalue the firm.
Page 16
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Chapter 15: Analyzing the Results
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Q1) An analyst is estimating the ROIC of a company that has zero fixed costs per unit and pays no taxes.The analyst makes the following forecasts: Sales next year will equal 250 units and will increase at 10 percent for each of the two following years.Prices per unit will be $102,$104,and $110,which simply embody inflation forecasts.Costs per unit will be constant at $90.Current capital invested is $20,000,and the firm will reinvest 50 percent of profits.What is the ROIC for each of the three years? If this is a competitive industry,are the results realistic?
A)ROICs in the next three years are 15.0 percent,17.9 percent,and 25.8 percent,respectively;results are realistic for a competitive industry.
B)ROICs in the next three years are 15.0 percent,16.5 percent,and 18.3 percent,respectively;results are realistic for a competitive industry.
C)ROICs in the next three years are 15.0 percent,16.5 percent,and 18.3 percent,respectively;results are not realistic for a competitive industry.
D)ROICs in the next three years are 15.0 percent,17.9 percent,and 25.8 percent,respectively,results are not realistic for a competitive industry.
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Chapter 16: Using Multiples
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Q1) Increasing growth and ROIC by the same amount while holding taxes and WACC constant will decrease the value-to-EBITA ratio.
A)True
B)False
Q2) Which of the following are reasons that the value-to-EBITA ratio is superior to the price-to-earnings ratio as a multiple to aid in valuation?
I.The P/E is distorted by capital structure.
II.The P/E is distorted by inflation.
III.The P/E is distorted by nonoperating gains and losses.
IV.The P/E is distorted by dividend payouts.
A)I and III only.
B)II and III only.
C)II and IV only.
D)I,III,and IV only.
Q3) The EV-to-revenue multiple is useful in valuing some companies.
A)True
B)False
Q4) List the three requirements for carrying out a useful analysis of comparable multiples.
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Chapter 17: Valuation by Parts
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Q1) There is undisputed evidence that conglomerate firms trade at a discount relative to a portfolio of pure-play firms.
A)True
B)False
Q2) Financing subsidiaries should be valued separately from other business units.
A)True
B)False
Q3) CEO salaries should be allocated to business units based on the number of employees in the units.
A)True
B)False
Q4) For multibusiness units,consolidated corporate results:
A)Must eliminate internal revenues,costs,and profits.
B)Are not possible.
C)Are computed by summing the inputs for each accounting entry across units.
D)Are computed by top-down algorithms that give estimated values based on the economic profit or cost of each entry.
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19
Chapter 18: Taxes
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Q1) The most comprehensive method for computing operating taxes from public data is to begin with reported taxes and undo financing and nonoperating items one by one.
A)True
B)False
Q2) Multinational Co.(MNC )generated $1,000 million in domestic earnings before interest,taxes,and amortization (EBITA).MNC amortizes intangible assets at $200 million per year and takes a $300 million interest expense.MNC's statutory (domestic )tax rate is 34 percent on earnings before taxes,but only 24 percent on foreign operations.MNC had $100 million of pretax foreign income and generates $20 million in ongoing research and development (R&D )tax credits.What is its effective tax rate on pretax profits?
A)26.7 percent.
B)29.0 percent.
C)31.5 percent.
D)33.3 percent.
Q3) Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.
A)True
B)False
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Chapter 19: Non-operating Items, Provisions, and Reserves
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Q1) Given the following entries,compute ROIC based on beginning-of-the-year investments.Assume that all invested capital entries are beginning-of-the-year entries and all income statement entries are for the entire year. Reported EBITA = 1,000 Reserve for plant decommissioning = 2,000 Interest associated with plant decommissioning = 200 Reserve for restructuring = 600 Equity = 4,000
A)12.12 percent.
B)14.81 percent.
C)18.18 percent.
D)22.22 percent.
Q2) List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.
Q3) All of the following are related to the ongoing core business EXCEPT: A)Royalty expense.
B)Restructuring charges.
C)Selling,general,and administrative (SG&A )expenses. D)R&D expenses.
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Chapter 20: Leases and Retirement Obligations
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Q1) Which of the following company types is most likely to have operating leases as an off-balance-sheet liability?
A)A financial services company.
B)A company with few fixed assets.
C)A company that uses large,easily transferable assets.
D)An established company whose age is greater than 20 years.
Q2) Since interest costs,expected returns on plan assets,and amortization of losses are part of the compensation expenses for a firm,they should be considered to be a part of NOPLAT.
A)True B)False
Q3) Investors,lenders,and rating agencies tend to interpret operating leases the same as traditional debt.
A)True
B)False
Q4) The interest rate for operating lease adjustments is usually higher than the firm's cost of debt.
A)True B)False
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Chapter 21: Alternative Ways to Measure Return on Capital
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Q1) According to U.S.Generally Accepted Accounting Principles (GAAP),which of the following must be expensed?
I.A patent developed by the firm.
II.A building.
III.Equipment.
IV.A distribution network.
A)I and II only.
B)I and IV only.
C)II and III only.
D)III and IV only.
Q2) If managers were given freedom to choose which expenses to classify as investments,which of the following is most accurate?
A)Managers will have an incentive to classify all expenses as investments.
B)Managers will have an incentive to classify no expenses as investments.
C)Managers will not have an incentive either way with respect to classifying expenses as investments.
D)Managers would most likely follow the rules established by GAAP,because they were formulated to be optimal for managers to follow.
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23
Chapter 22: Inflation
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Q1) A firm begins with nominal net working capital NWC t- = 200 and then increases it to NWC t = 250.The price index increases from IXt- = 144 to IXt = 166.Based on this information,what is the real investment in NWC in year t?
A)9.51
B)10.84
C)30.12
D)49.73
Q2) With respect to growth and operating margins,which is/are likely to be overstated in times of high inflation?
A)Growth only.
B)Operating margins only.
C)Both growth and operating margins.
D)Neither growth nor operating margins.
Q3) An analyst should make financial projections of income statements and balance sheets for a valuation in a high-inflation environment by simply projecting all items on a nominal basis.
A)True
B)False
Q4) What are the two indirect cash flow effects of inflation that depress value?
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Chapter 23: Cross-Border Valuation
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Q1) An analyst is estimating the value of a subsidiary using International Financial Reporting Standards (IFRS),and the country of the subsidiary is experiencing moderate inflation.In this case,which of the following accounting techniques is recommended?
A)Current method.
B)Temporal method.
C)Autoregressive method.
D)Inflation-adjusted current method.
Q2) List and describe the two methods for converting forecasted cash flows from one currency into another.
Q3) In the next two years,the expected inflation rates are 1 percent and 2 percent,respectively,and the real interest rates are expected to be 4 percent and 4 percent,respectively.Using this information,calculate the two-year interest rate yield as of now.
A)1.88 percent.
B)2.74 percent.
C)4.94 percent.
D)5.56 percent.
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25
Chapter 24: Case Study: Heineken
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Q1) Which of the following would be the most likely change(s )to be included in NOPLAT?
A)Changes in deferred taxes from tax rate revisions.
B)Change in deferred taxes as a result of acquisitions.
C)Change in deferred taxes as a result of the sale of a discontinued division.
D)Changes in deferred taxes from depreciation differences in net property,plant,and equipment (NPPE).
Q2) Given the following information concerning the pension of a company,compute the operating pension costs and the total pension costs in the income statement: current service costs = $39,past service costs = $2,interest obligation = $55,expected return on plan assets = $57.
A)$35 and $37,respectively.
B)$39 and $37,respectively.
C)$41 and $39,respectively.
D)$43 and $41,respectively.
Q3) When computing investment cash flows,all impairments should be subtracted to decrease property,plant,and equipment (PP&E),operating intangibles,and nonconsolidated investments.
A)True
B)False
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Page 26
Chapter 25: Corporate Portfolio Strategy
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Q1) Which of the following would be the LEAST likely way a private equity firm could add value to an acquired company?
A)Recapitalization.
B)Additional funds.
C)Distribution channels.
D)Managerial experience.
Q2) The type of owner that qualifies as best for a business may change over the course of the business's life cycle and will probably vary with its geography.
A)True
B)False
Q3) Which of the following would be the LEAST likely way a conglomerate could add value to an acquired company?
A)Innovation.
B)Additional funds.
C)Distribution channels.
D)Managerial experience.
Q4) Define corporate governance and describe the evidence of the role it can play in value creation from studies of the returns of private equity firms investing in companies.
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Chapter 26: Performance Management
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Q1) Which of the following are aspects of the firm that diagnostics of organizational health typically measure?
I.Its culture and values.
II.The depth of management talent.
III.The skills and capabilities of the company.
IV.Its ability to retain employees and keep them satisfied.
A)I,II,and III only.
B)I,III,and IV only.
C)II,III,and IV only.
D)I,II,III,and IV.
Q2) Which of the following value drivers is a short-term driver as opposed to a medium-term driver?
A)Asset health.
B)Commercial health.
C)Capital productivity.
D)Cost structure health.
Q3) List and describe the three categories of short-term value drivers.
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Chapter 27: Mergers and Acquisitions
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Q1) About one-third of all acquisitions create value,about one-third destroy value,and for the remaining third it is not clear whether value is created or destroyed.
A)True
B)False
Q2) List the four components that determine the value created for the acquirer in an acquisition and whether an increase in each increases or decreases that value.
Q3) When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if the stock market is in a bubble.
A)True
B)False
Q4) When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if:
A)The target is larger.
B)The target is smaller.
C)The stock market is in a bubble.
D)The acquiring firm has relatively low debt-to-equity ratios.
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Chapter 28: Divestitures
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Q1) Explain the reasons that a parent company may not want to give up control over a business unit it wants to divest and the preferred method of divestment in this case.
Q2) Which of the following is the best name for a distribution of all shares in a subsidiary to existing shareholders of the parent company?
A)Carve-out.
B)Spin-off.
C)Split-off.
D)Tracking stock.
Q3) Which of the following would be classified as a private divestiture?
I.Split-off.
II.Carve-out.
III.Trade sale.
IV.Joint venture.
A)I and II only.
B)I,II,and IV only.
C)II and III only.
D)III and IV only.
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Chapter 29: Capital Structure, Dividends, and Share
Repurchases
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Q1) Which of the following is the most important factor in determining a company's credit rating?
A)Size.
B)Coverage.
C)Tax bracket.
D)Use of a complex capital structure.
Q2) Although academic researchers have investigated the issue for decades,there is still no clear model for deciding a company's optimal leverage ratio (i.e. ,the leverage that would create most value for shareholders).
A)True
B)False
Q3) Business erosion is a result of too little leverage and the resulting stagnation and loss of customers.
A)True
B)False
Q4) Describe how leverage can cause business erosion.
Q5) Leverage and coverage measure the same thing but over different time horizons.
A)True
B)False
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Chapter 30: Investor Communications
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Q1) Which of the following is NOT a way that managers of most companies could improve their communication to investors?
A)Increase their understanding of their investor base.
B)Respond more actively to analysts' comments and the changing P/E ratio of the firm.
C)Tailor communications to the investors that matter most in determining share price.
D)Engage in a systematic analysis to determine if there really is a material discrepancy between their company's intrinsic value and its market value.
Q2) Do managers respond to increases in transparency by other firms and/or increases in the demands for transparency from investors?
A)No,managers do not respond to either.
B)Yes,managers respond positively to both.
C)Managers respond only to demands from investors but not to increases in the transparency of other firms.
D)Managers respond only to increases in the transparency of other firms but not to demands from investors.
Q3) Describe the basic goal of good investor communications.
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Chapter 31: Emerging Markets
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Q1) Which of the following best represents the relevance of purchasing power parity (PPP )when analyzing companies in emerging markets?
A)PPP does not hold between emerging and developed economies.
B)PPP holds over the long run,and exchange rates will adjust to inflation differentials.
C)PPP holds over the long run,but exchange rates will not adjust to inflation differentials.
D)It is not clear whether PPP holds,because there is not yet enough evidence one way or the other.
Q2) Given the following information for a company in a developing market,estimate the value of the company.The cash for the next year is estimated to be either $200 in the business-as-usual scenario or $50 in the distress scenario.The probabilities of the scenarios are 80 percent and 20 percent,respectively.The expected perpetual growth rate in each case is 5 percent per year,and the cost of capital is 11 percent.The value of the company is closest to:
A)$1,654.55
B)$2,500.00
C)$2,833.33
D)$3,333.33
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Chapter 32: Valuing High-Growth Companies
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Q1) Which of the following is the recommended method for dealing with the uncertainty of high-growth companies?
A)Real options.
B)Risk premium approach.
C)Monte Carlo simulation.
D)Probability-weighted scenarios.
Q2) To estimate the size of a potential market for a high-growth company,start by assessing how the company fulfills a customer need.Then determine how the company generates (or plans to generate )revenue.
A)True
B)False
Q3) Using the real-options approach to value a high-growth company has an advantage over the discounted cash flow method in that it requires fewer estimates (e.g. ,it does not require a long-term revenue growth rate).
A)True
B)False
Q4) Contrast the first step in the valuation process of an established company and a high-growth company.Explain the reason for the difference in approaches.
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Chapter 33: Cyclical Companies
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Q1) Which of the following are true concerning the properties of consensus earnings forecasts for cyclical companies?
I.They account for the cyclical nature of the firm.
II.Discounted cash flow (DCF )models are usually consistent with the facts.
III.The forecasts usually show an upward-sloping trend.
IV.The earnings and cash flow projections of the market are consistent with company performance.
A)I and II only.
B)I and III only.
C)II and III only.
D)II and IV only.
Q2) Which of the following is most accurate concerning predicting cycles and inflection points?
A)It is easy to predict both cycles and their inflection points.
B)It is easy to predict cycles,but it is difficult to predict inflection points.
C)It is difficult to predict cycles and more difficult to predict their inflection points.
D)It is hard to predict cycles,but once in a cycle,the inflection points are easy to predict.
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Chapter 34: Banks
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Q1) Which of the following will change the cost of equity?
I.Asset composition.
II.Liability composition.
III.The expected market return.
IV.The risk-free rate.
A)I and II only.
B)I,III,and IV only.
C)III and IV only.
D)I,II,III,and IV.
Q2) For financial institutions,which of the following is NOT true concerning trading income?
A)It has been on the decline over the past 30 years.
B)It is typically fairly volatile from year to year.
C)It can be derived from the trading of stocks and bonds.
D)It can be derived from the trading of swaps and other derivatives.
Q3) Explain why analysts estimating the values of banks should not use the discounted cash flow from operations method.What method should an analyst use?
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Chapter 35: Flexibility
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Q1) The option to increase scope,such as A hotel designed so that the owner can easily diversify beyond lodging services,such as by adding conference facilities,is most similar to:
A)A swap contract.
B)A put option on a stock.
C)A call option on a stock.
D)A futures contract on a bond.
Q2) Which of the following is most accurate concerning how a change in interest rates can produce an increase in the value of a project with flexibility?
A)It increases the present value of the cash flows.
B)A higher interest rate increases the time value of the deferral of an investment.
C)There is not any set relationship between interest rates and the value of flexibility.
D)Higher interest rates are more stable than lower rates and produce more stable cash flows.
Q3) List the two contingent valuation approaches.Identify which one is more sophisticated and explain when the less sophisticated approach might be preferred.
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