Asset Pricing & Valuation Models

Question 1

Which of the following statements regarding market multiples is true?

A. The P/E ratio of a firm with no growth opportunities will be equal zero.

B. As growth opportunities become a more important component of the total value of the firm, the P/E ratio will increase.

C. As growth opportunities become a more important component of the total value of the firm, the P/E ratio will decrease.

D. The P/E ratio is unrelated to the growth rate opportunities of a firm.

Answer 1

B

Question 2

Which of the following statements regarding market multiples is false? A. A price-to-book ratio greater than one indicates that a firm’s future prospects are being viewed favorably by investors.

B. Firms expected to earn high returns relative to risk typically have low price-to-book ratios.

C. A P/E ratio of 5 indicates that investors are paying $5 for each $1 of earnings.

D. The P/E ratio is commonly used to assess the investor’s appraisal of share value.

Answer 2

B

Question 3

Which of the following statements regarding the CAPM is true?

A. Investors should be compensated for bearing idiosyncratic risk.

B. Two assets with the same beta may have different expected rates of return.

C. The appropriate discount rate for a stock with a beta of 1 (β = 1) is the risk-free rate.

D. The appropriate discount rate for a stock with a beta of 1 is the market rate of return. 4. Table 10.2 provides other relevant information about an investment opportunity. What is the

Answer 3

D

Question 4

Which of the following factors is not required to calculate the price of an option according to the Black Scholes model?

A. Investor’s level of risk aversion.

B. Risk-free interest rate.

C. Maturity date.

D. Strike price.

Answer 4

A

Question 5

Which of the following statements regarding EVA is true?

A. It measures the spread between ROE and the opportunity cost of capital.

B. It measures the spread between the P/E ratio and the opportunity cost of capital.

C. It measures the spread between ROS and the opportunity cost of capital.

D. It measures the spread between ROA and the opportunity cost of capital.

Answer 5

D