1.

Question1

Errors in the discount rate can be problematic because (check all that apply):

1 point

This can lead to mistaken calculations of earnings before interest and taxes (EBIT).

This produces higher measured firm beta.

This can lead to erroneous decisions to repurchase shares.

This can lead to mistaken investment decisions.

2.

Question2

The CAPM formula for accounting for systematic risk is given by:

r = r_{f}

f

+ * (r_{m}

m

- r_{f}

f

)

A typical way of obtaining the risk-free rate is by using the:

1 point

1-year risk-free government bond rate

10-year risk free government bond rate

Difference between the average market return and the return on government bonds

Correlation between a firm's returns and the market returns

3.

Question3

The CAPM formula for accounting for systematic risk is given by:

r = r_{f}

f

+ * (r_{m}

m

- r_{f}

f

)

A typical way of obtaining a firm's beta is by using the:

1 point

1-year risk-free government bond rate

10-year risk free government bond rate

Difference between the average market return and the return on government bonds

Correlation between a firm's returns and the market returns

4.

Question4

What advice would you give to someone who was just starting to use modern valuation tools? (Please check all that apply.)

1 point

It is important to perform sensitivity analysis around the most critical assumptions of a model.

Ultimately, the value of a firm is negotiated between multiple parties, and discounted cash flows are only a tool that informs the negotiation.

Using multiples to value a large, well-established, firm is always a better method than discounted cash flows.

The terminal value (and our assumptions about long term growth rate) can have a disproportional effect on your calculation of the value of a firm.

We need to take into account the possibility that the risk-free rate and the market risk premium change over time by using a higher beta in the discount rate.

5.

Question5

Suppose that the risk-free rate is 5%, and the market risk premium (rM-rF) is 7.5%. What is your estimate of the discount rate if the beta is 1.2?

1 point

5%

12.5%

14%

13.5%