Business Valuation

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CORPFIN 2502
Business Valuation
Semester 2
2020
ONLINE TEST #1
September 1, 2020
ANSWER KEY
INSTRUCTIONS:

This is an individual examination. It is not a group project!
Failure to supply individual work will result in a zero exam score!
You have 60 minutes to complete your work on this test.
You may use one two-sided A4-size sheet with your personal notes, equations, etc. to work on this
exam. Notes/equations can be hand-written and/or typed.
Use your best judgement and understanding of the material in answering the questions.
I have provided all the necessary information you would need in order to supply an answer. However,
if you feel you need to make additional assumptions in order to answer a question feel free to do so as
long you are explicit about your assumptions!
If you think that the correct answer to a question is not among the listed alternatives then please write
down your answer and clearly indicate that this is what you believe the correct answer is.
CORPFIN 2502 Business Valuation 2020 Semester 2 Online Test #1 Page 2 of 4
A. True/False Questions
Each true/false question in this section is worth 4 points. There are 10 true/false questions altogether in
this section of the exam and they are worth a total of 40 points. Circle T or F (but only one for full credit!)
if you believe that the statement is True or False, respectively.
T F 1. In the context of DCF, a company maintaining a capital structure policy of a xed
level of debt will experience a gradual decline in its levered equity beta in the future.
(All all other inputs remain unchanged.)
T F 2. 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 xed.)
T F 3. 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 xed.)
T F 4. The conventional dividend payout ratio will, typically, be smaller than the modied
dividend payout ratio. (Assuming the company buys back some shares.)
T F 5. The amount of money raised by a new equity issue by the rm does not constitute
free cash
ow to equity.
T F 6. In the context of CAPM, a risky asset with = 0 will have a positive expected
return. (Assuming the risk-free rate is positive and investors are risk-averse.)
T F 7. If the corporate income tax rate increases then greater leverage ratios will lead
to an increase in ROE.
T F 8. In DCF valuation, capitalizing operating lease expenditures will typically lead to
a material change in the company’s EBIT.
T F 9. In the context of DDM, a dividend payout ratio equal to 0% implies that the equity
value today will be equal to $0.
T F 10. Every company with ROE exceeding its cost of equity will be worth even more if mana-
gement were to reinvest a larger fraction of the company’s earnings.
Date: September 1, 2020 Time: 3:00pm{5:00pm Location: MyUni Quiz Tool
CORPFIN 2502 Business Valuation 2020 Semester 2 Online Test #1 Page 3 of 4
B. Multiple Choice Questions
Each multiple choice question in this section is worth 6 points. There are 10 multiple choice questions
altogether in this section of the exam and they are worth a total of 60 points.
Circle (a), (b), (c), or (d) (but only one for full credit!) if you believe that the statement is accurate.
Lot 15 Pty. is forecast to have a dividend growth rate of 7% in perpetuity and its dividend payout ratio
(DPY) is expected to be equal to 37% in perpetuity. What is the expected return on equity (ROE) equal
to?
(a) 11.11%.
(b) 18.92%.
(c) 33.33%.
(d) 66.67%.
Wacky Warehouse Inc. is expected to have a weighted-average cost of capital equal to 9%. The company
has a debt-to-equity ratio equal to 2. Wacky Warehouse Inc.’s after-tax cost of debt is equal to 5%. The
cost of equity must be equal to:
(a) 9%.
(b) 17%.
(c) 22%.
(d) 27%.
Tic Toc Inc. has an expected rate of return on equity next year, ROE1, equal to 12.5% and a dividend
payout ratio next year, DPY1, equal to 80%. Tic Toc Inc.’s equity beta is equal to 1 and the company is
expected to pay dividend per share next year, DPS1, equal to $1. The long-run risk-free rate is equal to
2.5% while the stock market risk premium is equal to 5%. If Tic Toc Inc. change their dividend payout ratio
next year to 60% then their intrinsic equity value per share will be equal to:
(a) $10.00.
(b) $20.00.
(c) $30.00.
(d) $40.00.
The ASX All Ordinaries index is currently trading at 6000 points and is widely expected to pay a dividend
(DPS1) equal to 360 points next year. At the same time, shares in ABC Corp. are trading at $20 and are
expected to pay a dividend next year (DPS1) equal to $1. The consensus analyst forecast is that the growth
rate of both ABC Corp. dividends and ASX All Ordinaries dividends will be 4% in perpetuity. The long-run
risk-free rate is given as 5%. Assuming that the market prices of the ASX All Ordinaries index and ABC
Corp. are ecient, what is the beta of ABC Corp.’s using the ASX All Ordinaries index as the market
portfolio?
(a) 0.8.
(b) 0.9.
(c) 1.0.
(d) 1.2.
G&T Corp. (GTC) currently has an ROE of 12%, total assets of $1000 and a dividend payout ratio
of 50%. GTC’s beta is currently equal to 2 and they have no debt. The marginal corporate income tax
rate is equal to 50%. The long-term risk free rate is currently equal to 2% and the expected stock market
risk premium is equal to 5%. If GTC increase their debt-to-equity ratio to 1 with an after-tax cost of debt
equal to 4% and simultaneously reduce their dividend payout ratio to 40% then GTC’s new intrinsic value
of equity will be equal to:
(a) $500.
(b) $600.
(c) $700.
(d) $800.
Date: September 1, 2020 Time: 3:00pm{5:00pm Location: MyUni Quiz Tool
CORPFIN 2502 Business Valuation 2020 Semester 2 Online Test #1 Page 4 of 4
Ouzo AE. is expected to pay a dividend per share next year equal to $1.00 and is forecast to have a
dividend payout ratio of 50% in perpetuity. The company is also forecast to have an ROE of 20%. The
market price per share is $4 which also happens to equal the intrinsic value of equity per share, i.e., the
market price is ecient. What is the implicit discount rate which makes the intrinsic equity value per share
equal to market price per share?
(a) 10.25%.
(b) 17.50%.
(c) 20.00%.
(d) 35.00%.
Net
ex Corp. is expected to have earnings per share next year (EPS1) of $0.12. Analysts expect
Net
ex Corp.’s return on equity (ROE) will equal 12% in perpetuity. It is also expected that the company’s
dividend payout ratio will be equal to 50% in perpetuity. Under the dividend discount model and assuming
the intrinsic equity value is equal to the book value of equity, the required rate of return on equity, re, must
be equal to:
(a) 1.2%.
(b) 6%.
(c) 12%.
(d) 24%.
Quaternion Corp. currently has a rate of return on capital (ROC) of 10% and is expected to be able to
maintain that in perpetuity. The company has a debt-to-equity ratio of 1, faces a corporate income tax rate
of 50% and pays 4% before-tax interest rate on its debt. Quaternion Corp. is expected to have earnings
per share next year of $1 and is expected to have a dividend-payout ratio of 50% in perpetuity. Shares in
Quaternion Corp.’s stock are forecast to have an unlevered = 2. The risk-free rate is currently equal to
1% and the market risk premium is equal to 3%. According to the dividend discount model, Quaternion
Corp.’s current intrinsic value per share must be equal to:
(a) $10.00.
(b) $25.00.
(c) $50.00.
(d) $100.00.
Zero G Inc. currently has an earnings growth rate of 0% which is expected to stay constant in perpetuity.
Zero G Inc.’s next year’s dividend per share is expected to be equal to $1.20 and their cost of equity is equal
to 12%. What is the intrinsic value of one share of stock in Zero G Inc. equal to?
(a) $1.20.
(b) $2.40.
(c) $10.00.
(d) $12.00.
Virion Corp. currently has a book value of equity per share equal to $100. The company is expected to
have ROE of 21% and reinvest 100% of its earnings every year over the course of the next 4 years. According
to analysts’ forecasts, Virion Corp. will be liquidated at the end of year 4 with a liquidation value equal to
the book value of equity per share at the end of year 4. The required rate of return on the company’s equity
is equal to 10%. What is the current intrinsic value of one share of stock in Virion Corp.? (Assume that the
current, i.e., t = 0 dividend has already been paid.)
(a) $100.00.
(b) $146.41.
(c) $161.05.
(d) $177.16.
(e) $194.87.
END OF ONLINE TEST #1
Date: September 1, 2020 Time: 3:00pm{5:00pm Location: MyUni Quiz Tool

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