Reference no: EM132622791

True or false questions

In DCF valuation, capitalizing operating lease expenditures will typically lead to a material change in the company's EBIT.

In DCF valuation, a company can increase its equity value by borrowing more money provided that the return on capital exceeds the after-tax cost of debt. (Assume all other inputs are fixed.)

Every company with ROE exceeding its cost of equity will be worth even more if management were to reinvest a larger fraction of the company's earnings.

The conventional dividend payout ratio will, typically, be smaller than the modified dividend payout ratio. (Assuming the company buys back some shares.)

In the context of DDM, a dividend payout ratio equal to 0% implies that the equity value today will be equal to $0.

The amount of money raised by a new equity issue by the firm does not constitute free cash flow to equity.

A major assumption of DCF valuation is that a company needs to periodically issue debt to match any reinvested retained earnings in order to stay on target with its debt-equity leverage ratio. (Assume all other inputs are fixed.)

In the context of CAPM, a risky asset with β = 0 will have a positive expected return. (Assuming the risk-free rate is positive and investors are risk-averse.)

In the context of DCF, a company maintaining a capital structure policy of a fixed level of debt will experience a gradual decline in its levered equity beta in the future. (All all other inputs remain unchanged.)

If the corporate income tax rate increases then greater leverage ratios will lead to an increase in ROE.