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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

Two similar companies acquire substantial new production facilities, which they both will depreciate over a 10-year period. However, Company A uses accelerated depreciation while Company B uses
The largest number of NYSE members are registered as: a. b. C. d. stockholders commission brokers specialists floor traders
The second largest number of NYSE members are registered as: a. b. C. d. stockholders commission brokers specialists floor traders
Specialists on the NYSE typically: a. b. PR C. independent dealers representatives of the major stock brokerage firms appointed by the SEC d. associated with one of about 40 specialist firms
Which of the following activities are not conducted by specialists on the NYSE?: a. b. C. act as dealers for their own accounts monitor compliance with margin requirements provide liquidity to the
Which of the following is a common feature of both the Nasdaq National Market and the New York Stock Exchange? a. the New York City location for operations b. the reliance on commission brokers for
The following stock quote for Ehrhardt-Daves Corporation (EDC) appeared in the financial press:What was the last quarterly dividend paid for EDC? 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi
In Figure 3.1, locate the AT&T bond that matures in the year 2000. What is the coupon rate on this issue? Suppose you purchase $100,000 in face value. How much will this cost? Assuming semiannual
On what basis do we normally distinguish money market Fixed-Income Securities? a. b. c. d. issuer interest rate maturity tax status
A corporation with common stock issued to the public pays dividends a. at the discretion of management, who are elected by the shareholders b. at the discretion of shareholders, since they own the
A dividend payment on preferred stock a. can never be omitted if the company is earning a profit b. C. is automatically omitted if the company realizes a loss from operations can be omitted at the
You buy 10 SPX put options with a strike price of 920 at a quoted price of \($8.\) The contract size for SPX options is 100 times the S&P 500 index. At option expiration, the S&P 500 is at
Suppose you bought 200 shares of stock at an initial price of \($42\) per share. The stock paid a dividend of \($2.40\) per share during the following year, and the share price at the end of the year
The rate of return on Jurassic Jalopies, Inc., stock over the last five years was 25 percent, 17 percent, -22 percent, 29 percent, and 8 percent. Over the same period, the return on Stonehenge
An investment has an expected return of 10 percent per year with a standard deviation of 20 percent. Assuming that the returns on this investment are a least roughly normally distributed, how
An investment has an expected return of 6 percent per year with a standard deviation of 3 percent. Assuming that the returns on this investment are at least roughly normally distributed, how
Suppose you want to buy 10,000 shares of Intel Corporation at a price of \($30\) per share. You put up \($200,000\) and borrow the rest. What does your account balance sheet look like? What is your
Which of the following agencies provides customer insurance protection for individual brokerage accounts? a. b. c. d. Federal Deposit Insurance Corporation (FDIC) Federal Investor Protection Agency
Using the following retums, calculate the average retums, the variances, and the standard deviations for the following stocks: Year Michele, Inc. Janicek Co. 12345 1 12% 5% 2 -4 -15 0 10 4 20 38 5 2
A stock pays a \($1.50\) dividend and falls in price from \($56.25\) to \($52.75.\) What is the stockholder's total dollar return? a. -$1.50 b. -$2.00 C. -$2.50 d. -$3.00
A stock pays a \($1\) dividend and rises in price from \($50\) to \($53.\) What is the stockholder's total percentage return? a. 8% b. 4% C. 5% d. -2%
Over a one-year period, a bond pays 7 percent interest and its price falls from \($100\) to \($98.\) What is the bondholder's total realized one-year retum? a. 9% b. 7% C. 5% d. -2%
The total dollar return on an investment is conventionally said to have two components. What are these two components? a. b. C. d. a cash payment and a capital gain or loss a dollar return and a
The first lesson of financial markets history is a. b. c. d. don't put all your eggs in one basket put all your eggs in one basket and watch that basket buy low and sell high risky assets on average
Over a four year period, an investment in T-Rex common stock yields returns of 30 percent, 0 percent, -10 percent, and 20 percent. What is the standard deviation of return for T-Rex stock over this
You calculate an average historical retum of 10 percent and a standard deviation of return of 10 percent for an investment in Stonehenge Construction Co. You believe these values represent well the
Which of the following statements about a normal distribution is incorrect? a. 46 a normal distribution is symmetrically centered on its mean b. the probability of being within one standard deviation
You are trying to value three-month call and put options on Merck with a strike price of \($30.\) The stock is trading at \($28.75,\) and the company expects to pay a quarterly dividend per share of
See Saw Toys reported that it had a book value of equity of \($1.5\) billion at the end of 1998 and 100 million shares outstanding. During 1999, it bought back 10 million shares at a market price of
An analyst who looks at real estate decides to apply the capital asset pricing model to estimate the risk (beta) for real estate. He regresses returns on a real estate index (based on appraised
An alternative way of estimating risk for real estate is to use prices on traded REITs to compute returns, and to regress these returns against a stock index to arrive at a beta estimate. Would this
Would your valuation of real estate by affected by who the potential investors in the property are? (For instance, would your analysis be any different if the primary investors were individuals
How would you factor in the absence of liquidity into your valuation?
You have been asked to value an office building in Orlando, Florida, with the following characteristics:The building was built in 1988, and has 300,000 square feet of rentable area.There would be an
You are trying to value the same building based on comparable properties sold in recent years. There have been six property sales of buildings of comparable size in the surrounding area.a. Estimate
Cool Café is a well-regarded restaurant in the Denver area, owned and run by Joanne Arapacio, a star chef specializing in Southwestern cuisine. You are interested in buying the restaurant and have
Sick and tired of the investment banking grind, you decide to quit and buy a franchise for a fast-growing bagel chain in your town. You have been able to get information on what another franchise for
You work for a publishing company and are considering bidding for the copyright to Cook Light, Cook Right, a cookbook of low-fat recipes.While the book was out of print last year, you believe that
You have been asked to value the practice of Dr. Vong, a pediatrician in your town, and are provided with the following facts:The practice generated $800,000 in revenues last year, and these revenues
You are trying to decide how much you should bid on a Ken Griffey Jr. rookie baseball card in good condition on eBay. You notice that there have been eight transactions involving Ken Griffey Jr.
Assume that you are a wealthy investor with your entire portfolio invested in stocks. Your financial adviser has suggested that you buy some fine art to balance the portfolio and based this
A company is considering delaying a project with after-tax cash flows of \($25\) million but that costs \($300\) million to take on (the life of the project is 20 years, and the cost of capital is
You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits in them. A geologist survey suggests that there might be
You have been asked to analyze the value of an oil company with substantial oil reserves. The estimated reserves amount to 10 million barrels, and the estimated cost of developing these reserves
Cyclops Inc., a high-technology company specializing in state-of-theart visual technology, is considering going public. While the company has no revenues or profits yet on its products, it has a
NBC has the rights to televise the Winter Olympics in two years, and is trying to estimate the value of these rights for possible sale to another network. NBC expects it to cost \($40\) million (in
You are analyzing Skates Inc., a firm that manufactures skateboards.The firm is currently unlevered and has a cost of equity of 12%. You estimate that Skates would have a cost of capital of 11% at
Disney is considering entering into a joint venture to build condominiums in Vail, Colorado, with a local real estate developer. The development is expected to cost \($1\) billion overall and, based
Quality Wireless is considering making an investment in China.While it knows that the investment will cost $1 billion and generate only$800 million in cash flows (in present value terms), the
Reliable Machinery Inc. is considering expanding its operations in Thailand. The initial analysis of the project yields the following results:The project is expected to generate \($85\) million in
Designate the following statements as true or false:a. Equity can be viewed as an option because equity investors have limited liability (limited to their equity investment in the firm).True ____
XYZ Corporation has \($500\) million in zero coupon debt outstanding, due in five years. The firm had earnings before interest and taxes of \($40\) million in the most recent year (the tax rate is
McCaw Cellular Communications reported earnings before interest and taxes of \($850\) million in 1993, with a depreciation allowance of\($400\) million and capital expenditures of \($550\) million in
You have been asked to analyze the value of equity in a company that has the following features:The earnings before interest and taxes is \($25\) million, and the corporate tax rate is 40%.The
You are valuing the equity in a firm with \($800\) million (face value) in debt with an average duration of six years and assets with an estimated value of \($400\) million. The standard deviation in
Marion Manufacturing, a steel company, announces that it will be taking a major restructuring charge that will lower earnings this year by$500 million. Assume that the charge is not tax deductible
Universal Health Care (UHC) is a company whose stock price has declined by 40% in the past year. In the current year, UHC earned \($300\) million in pretax operating income on revenues of \($10\)
Atlantic Cruise Lines operates cruise ships and is headquartered in Florida. The firm had \($100\) million in pretax operating income in the current year, of which it reinvested \($25\) million. The
Furniture Depot is a retail chain selling furniture and appliances. The firm has after-tax operating income of \($250\) million in the current year on revenues of \($5\) billion. The firm also has
General Systems is a firm that manufactures personal computers. As a top manager in the firm, you are considering changes in the way the firm is run. Currently, the firm has after-tax operating
Compaq Computer has seen its stock price decline from \($45\) to \($24\) The firm is expected to reinvest 50% of its expected after-tax operating income of \($2\) billion in new investments, and
Referring to problem 6, now assume that Compaq’s optimal debt ratio is 20%. Its cost of equity will increase to 12.5%, and its after-tax cost of debt will be 4.5% at the optimal debt ratio.a. What
Coca-Cola is considered to have one of the most valuable brand names in the world. The firm has an after-tax operating margin of 20%on revenues of \($25\) billion. The capital invested in the firm is
BioMask Genetics is a biotechnology firm with only one patent to its name. The after-tax operating earnings in the current year are \($10\) million, and the firm has no reinvestment needs. The patent
Sunmask is a cosmetics firm that has seen its stock price fall and its earnings decline in the past year. You have been hired as the new CEO of the company, and a careful analysis of Sunmask’s
Everlast Batteries Inc. has hired you as a consultant. The firm had after-tax operating earnings in 1998 of $180 million and net income of$100 million, and it paid a dividend of $50 million. The book
Assume, in the preceding problem, that Everlast Batteries is in stable growth, and that it expects its economic value added to grow at 5% a year forever.a. Estimate the value of the firm.b. How much
Stereo City is a retailer of stereos and televisions. The firm has operating income of $150 million, after operating lease expenses of $50 million. The firm has operating lease commitments for the
Sevilla Chemicals earned $1 billion in after-tax operating income on capital invested of $5 billion last year. The firm’s cost of equity is 12%, its debt-to-capital ratio is 25%, and the after-tax
Jeeves Software is a small software firm in high growth. The firm is all equity financed. In the current year, the firm earned $20 million in after-tax operating income on capital invested of $60
Healthy Foods is a company that produces canned soups made without preservatives. The firm has assets that have a book value of$100 million. The assets are five years old and have been depreciated$50
You have estimated the value per share for Littlefield Inc., a transportation company, under three scenarios: \($5/share\) under the worst case scenario, \($30/share\) under the best-case scenario,
You are analyzing Delta Enterprises, a small publicly traded company with \($50\) million of debt outstanding, and 25 million shares, trading at\($10/share.\) The firm generated \($40\) million in
You are valuing Signet Bank during a period of substantial uncertainty about future regulatory rules. Signet Bank generated \($100\) million in net income last year on a book value of equity of
Sigma Energy is an alternative energy company that produces solar energy panels. The company is expected to generate $50 million in after-tax operating income in the next year, but its prospects for
Chavez Enterprises is a small Venezuelan company. The firm is profitable and is expected to generate 120 million bolivars in after-tax operating income next year on capital invested (book value) of
Loral Drugs is a biotechnology firm that is working on a new drug to treat insomnia. The drug is working its way through the FDA approval process and is expected to generate $150 million in after-tax
You are a venture capitalist who is interested in investing \($50\) million in Friends Online, a social media company. The business will take three years to become operational (during which period it
You are valuing Stedman Inc., a chemical firm in stable growth(growing 3 percent a year) that is expected to generate $100 million in after-tax operating income next year. You have estimated the
Simon Gold is a mature gold mining firm that has mines that are expected to generate 100,000 ounces of gold every year for the next 25 years; at the end of that period, the mines will be exhausted
You are a portfolio manager and have analysts who have used Monte Carlo simulations to find 10 undervalued companies, listed here:a. Purely on an expected value basis, rank these companies (from best
Intellitech is a technology firm that has been in operating for two years. In the most recent year, the firm reported revenues of \($500\) million, five times revenues in the previous year. The firm
You are trying to estimate the trailing 12-month earnings for Fiber Networks. The firm has just reported an operating loss for the first quarter of 2001 of \($180\) million on revenues of \($600\)
Verispace Software sells inventory management software and reported revenues of $25 million in the most recent financial year. You estimate that the total market for inventory management software to
Lumin Telecomm produces specialized telecommunication equipment and has made losses each year over the three years it has been in existence—it has an accumulated net operating loss of \($180\)
You have estimated the value of Vitale Systems, an Internet software firm, to be $700 million as a going concern, seven times its book value.However, you are concerned that Vitale might not survive
You have been asked to value Barrista Espresso, a chain of espresso coffee shops that have opened on the East Coast of the United States.The company had earnings before interest and taxes of
You have valued a business, using discounted cash flow models, at\($250\) million for a private sale. The business, which does make money, had revenues of \($200\) million in the most recent year.
You are valuing a bed-and-breakfast in Vermont with the following information:The business had pretax operating income of $100,000 in the most recent year. This income has grown 5% a year for the
You have been asked by the owner of Tectonics Software, a small firm that produces and sells computer software, to come up with an estimate of value for the firm for an initial public offering. The
How would your answer to (4) change if you were valuing Tectonics Software for sale to a private individual? The individual in question has a portfolio that is not diversified and has a correlation
The following are the details of two potential merger candidates, Northrop and Grumman, in 1993:Both firms are are expected to grow 5% a year in perpetuity. Capital spending is expected to be 20% of
In the Grumman-Northrop example described in the previous question, the combined firm did not take on additional debt after the acquisition. Assume that as a result of the merger the firm's optimal
In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information about the two companies was as
Assume, in the Novell-WordPerfect merger described in the preceding question, that it will take five years for the firms to work through their differences and start realizing their synergy benefits.
In 1996, Aetna, a leading player in health insurance, announced its intentions to acquire U.S. Healthcare, the nation's largest health maintenance organization, and provided synergy as a rationale.
IH Corporation, a farm equipment manufacturer, has accumulated almost $2 billion in losses over the past seven years of operations and is in danger of not being able to carry forward these losses. EG
You are considering a takeover of PMT Corporation, a firm that has significantly underperformed its peer group over the past five years, and you wish to estimate the value of control. The data on PMT
You are attempting to do a leveraged buyout of Boston Turkey but have run into some roadblocks. You have some partially completed projected cash flow statements and need help to complete them.The
J & L Chemical is a profitable chemical manufacturing firm. The business, however, is highly cyclical, and the profits of the firm have been volatile. The management of the firm is considering

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