Question
1. Which of the following statements is incorrect? a. Ordinarily, the risk-free rate of interest (Rf) is assumed to be the rate of return on
1. Which of the following statements is incorrect?
a. Ordinarily, the risk-free rate of interest (Rf) is assumed to be the rate of return on a U.S. Treasury security with time to maturity equal to the expected holding period of the security in question.
b. The price of an asset can be greater than its value (in which case we say that the asset is undervalued), less than its value (overvalued), or equal to its value (overvalued).
c. The free cash flow (FCF) model shows that the value of the entire firm is the present value of the expected future operating cash flows less expected investments (short and long-term).
d. Net Operating Profit after Tax (NOPAT) is: NOPAT = EBIT(1 - Tax Rate).
2. Which of the following statements is incorrect?
a. Free cash flow is defined as total operating cash flow after taxes less the reinvestment in operating assets that is required to maintain the firms growth rate.
b. The risk-neutral investor can have different risk preferences, and therefore two risk-neutral investors are likely to have different required returns for the same asset.
c. Houses are traded only rarely in the markets to determine their true market value and therefore we rely on estimates of market value made by experts or real estate appraisers.
d. The intrinsic value of an asset is the present value of the expected future cash flows of the asset discounted by the required rate of return for the investor.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started