Reference no: EM132467731

Question 1. If investors have invested $20,000 of common equity in a company and it is determined that the required earnings of the company are $1,250 each period, then investors must expect to earn what return?

a. 6.25% b. the market premium c. 9% d. the risk free rate

Question 2. Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?

a. A firm in a capital intensive industry that is expected to operate near capacity for the near future.

b. A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.

c. A firm operating in an industry that is expected to experience technological improvements in its production process.

d. A firm in a capital intensive industry in which excess capacity exists.

Question 3. A disadvantage of the free cash flow valuation method is:

a. The projection of free cash flows depends on earnings estimates.

b. The terminal value tends to dominate the total value in many cases.

c. The free cash flow method is not rigorous.

d. The free cash flow method is not used widely in practice.

Question 4. Required earnings are the:

a. net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.

b. the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.

c. adjusted net income multiplied by the required rate of return on common equity capital.

d. the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.