Exam revision Flashcards
In the context of relative valuation, the PB ratio can never be greater than the
EV/Book value of capital ratio. (Assume all other inputs stay the same.)
False
In the context of a single-stage growth model, the PE ratio always increases when the
reinvestment rate increases. (Assume all other inputs except the growth rate stay the
same.
False only if ROE is greater than Cost of equity
Assuming all other variables except the growth rate stay constant, an increase in the
forecast for ROC will result in higher EV/EBIT(1-t), EV/BV and EV/Sales ratios
True
A two-state one-period binomial option pricing model with PV$1u= 0:00 andPV$1d= 0:50 contains an arbitrage opportunity.
True U>R>D
If a company decreases the maturity of its debt, everything else being equal, the value
of the company’s equity will increase in the context of real option valuation.
False: maturity decreases, leads to increase in value of debt, decreases value of equity
A = L + E
A risky corporate bond will always trade at a discount to its face value due to the
possible losses to bondholders in case of default.
False: if coupon rate > ytm it will trade at a premium
Risky corporate convertible bonds oering negative promised yields to maturity entail
an arbitrage opportunity, provided an investor can sell the bonds short.
false, convertable means they can make the price exceed the face value.
A puttable bond is worth more than an otherwise identical non-puttable bond to the issuing firm.
True: bondholders are willing to pay more for the put option bond as they can demand their money back earlier incase of an increase in i and reinvest at a higher rate.
In the context of real option pricing, a government guarantee to pay back all deposits
of a bank’s customers will increase the value today of the bank’s equity
False, garuntee does nothing to increase the banks equity
The ability to increase output at no additional fixed cost is an example of a real option.
True: flexibility
A negative enterprise value of the firm implies an arbitrage opportunity.
False
Convertible bonds are more risky than non-convertible bonds but less risky than preferred stock issued by the same firm.
True: debt safer than equity
A risk-neutral probability of 0% implies there is no arbitrage opportunity.
False
The forward P/FCFE ratio will always increase when ROE goes up. (All else but the
growth rate stays the same.)
True: ROE increase, G increases, P/FCFE increases
An option on stock price volatility will be more valuable when the stock price volatility
is less volatile.
false, worth more when more volatile
A risk-free government bond that has an infinite time to maturity will still have a finite modified duration as well as a finite convexity measure
True
If two stocks have the same P/E ratio but are trading at different market prices then
there must be an arbitrage opportunity.
false: PE has nothing to do with arbitrage
In the context of the adjusted present value (APV) model, it is wrong to use the
unlevered cost of equity to discount future cash
ows to the firm in finding the
unlevered firm value.
True
A two-state one-period binomial option pricing model with PV$1u= 1:00 andPV$1d= 1:00 contains an arbitrage opportunity
True U=D when U>R>D
In theory, a company with a negative enterprise value (EV) is an example of an
arbitrage opportunity.
True
One major assumption in the cost of capital approach to rm valuation is that the
business will maintain its level of debt constant in perpetuity
False, it is not expected that a firm hold its debt to equity ratio constant
In the context of binomial option pricing model of valuing a firm’s equity and debt,
an increase in the volatility of the assets will lead to a lower value of equity.
False, pricing equity is similar to pricing a call option, as volatility increases so too does the value of the option/ in this case equity
A European call option on the ASX index maturing in December 2015 will be more
valuable today if the expected return on the ASX index is revised upwards.
False, value of a call option has nothing to do with expected return of the market, only if the price of the stock increases above the exercise price.
All else being equal, a convertible bond’s promised yield-to-maturity is higher than
the promised yield-to-maturity of an equivalent non-convertible bond.
False, value of the bond is more when it is convertible therefore we would expect the ytm to be lower to increase PV