Balance Sheet and Value

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Learning Goal 6:
Explain the relationships among financial decisions, return, risk, and the firm's value.

1)
Any action taken by the financial manager that increases risk will also increase the required return. True or False 2)
In common stock valuation, any action taken by the financial manager that increases risk will cause an increase the required return. True or False 3)
In common stock valuation, any action taken by the financial manager that increases risk will cause an increase in value. True or False 4)
An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; An action that reduces the level of expected cash flows without a corresponding decline in risk should increase share value. True or False 5)

Assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should decrease the firm's value. True or False 6)

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________. A)

overvalued
B)
undervalued
C)
properly valued
D)
not enough information to tell
7)
Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________. A)

overvalued
B)
undervalued
C)
properly valued
D)
not enough information to tell

8)
Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.

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(a)Estimate the value of Tangshan Antiques stock.
(b)A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit. 9)

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20. (a)What is the expected return based on the dividend valuation model? (b)What is the required return based on the CAPM?

(c)Would Tangshan China be a good investment at this time? Explain

Learning Goal 5:
Discuss the free cash flow valuation model and the book value, liquidation value, and price/earnings (P/E) multiple approaches.

1)
In valuation of common stock, the price/earnings multiple approach is considered superior to the use of book or liquidation values since it considers expected earnings. True or False 2)
The common stock book value model ignores the firm's expected earnings potential and generally lacks any true relationship to the firm's value in the marketplace. True of False 3)
The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is, the value of a share of stock is the present value of future cash flows. True or False 4)

The free cash flow valuation model is based on the same...
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