Valuation Concepts and Methodologies

INCOME BASED VALUATION

16. A key factor that is used to discount the net cash flows in the future is

a. cost of equity

b. cost of earnings

c. cost of debt

d. cost of capital

17. The cost of ______ can be computed primarily by getting the weight of cost of sources of fund, through___________ and___________

a. cost of equity, weighted average cost of capital; capital asset pricing model

b. cost of equity, average cost of capital, capital asset pricing model

C. cost of capital; weighted average cost of capital; capital asset pricing model

d. cost of capital; average cost of capital; capital asset pricing model

18. The __________ is a calculation of a firm's __________ in which each category of _____ is proportionately weighted.

a. weighted average cost of capital, capital; cost of capital

b. weighted average cost of capital; cost of capital, capital

c. average cost of capital; capital, cost of capital

d. average cost of capital; cost of capital, capital

19. The beta in Capital Asset Pricing Model is

a. use to represent volatility/risk of the market

b. arbitrary systematic risk coefficient

c. the pricing multiple used to compute for the cost of capital

d. the credit spread/debt premium added to risk free rate.

20. The following statements are correct for the Economic Value Added (EVA), except

a. The most conventional way to determine the value of the asset is through its economic value added

b. Economic value added (EVA) is a convenient metric in evaluating investment as it quickly measures the ability of the firm to support its cost of capital using its earnings.

c. EVA is the excess of the company's equity after deducting the cost of capital

d. The general concept here is that higher EVA is better for the firm

21. The elements that must be considered in using EVA are as follows, except

a. Reasonableness of earnings

b. Appropriate cost of capital

c. Volatility of the market

d. Both a and b

22. In which income based valuation method wherein the value of the asset or the investment is determined using the anticipated earnings of the company divided by the cost of capital?

a. Economic Value Added (EVA)

b. Capitalization of Earnings Method

C. Capital Asset Pricing Method

d. Discounted Cashflow Method

23. The following statements are factual discussions about Capitalization of Earnings Method except:

a. In capitalization of earnings method, the value of the asset or the investment is determined using the anticipated earnings of the company divided by the cost of capital.

b. You may use past earnings in the Capitalization of Earnings method for cases wherein earnings are fixed

c. The formula used in Capitalization of Earnings is actually grossing up the future earnings using capitalization rate to come up with the estimated asset value.

d. Cost of Capital used in the Capitalization of Earnings method is equivalent to the expected yield or the required rate of return.

24. In capitalization of earnings method, these types of assets are not part of the computation hence need to be added to the Capitalized Earnings.

a. Fixed Assets

b. Idle Assets

c Current Assets

d. Noncurrent Assets

25. The following statements are limitations of capitalization of eamings method, except

a. this does may not fully account for the future earnings or cash flows thereby resulting to over or undervaluation

b. inability to incorporate contingencies

c. assumptions used to determine the cashflows may not hold true since the projections are based on a limited time horizon.

d. It is simple and convenient