Week 5 Dam 6,7

Question 1

In relative valuation, we value an asset based on …

Answer 1

…how similar assets are priced in the market.

Question 2

Price Earnings (PE) is:

Answer 2

PE = Market Price per Share / Earnings per Share

Question 3

Other things held equal, higher growth firms will typically have …PE ratios than lower growth firms

Answer 3

higher

Question 4

Other things held equal, higher risk firms will have … PE ratios than lower risk firms

Answer 4

lower

Question 4

Other things held equal, firms with lower reinvestment needs will have … PE ratios than firms with higher reinvestment rates

Answer 4

higher

Question 5

A low PE might mean the firm is (under/over)valued.

Answer 5

Undervalued

Question 6

High expected growth in earnings might mean the firm is (under/over)valued.

Answer 6

Undervalued

Question 7

Low reinvestments needs might mean the firm is (under/over)valued.

Answer 7

Undervalued

Question 8

Fundamental PEG Ratio:

Answer 8

PEG*(1/g)

Question 9

High risk companies will trade at … PEG ratios than low risk
companies with the same expected growth rate

Answer 9

lower

Question 10

Low risk companies will trade at … PEG ratios than high risk companies with the same expected growth rate.

Answer 10

Higher

Question 11

Companies with low reinvestment rates (that attain growth efficiently) will have … PEG ratios.

Answer 11

high

Question 12

Companies with very low or very high growth rates will tend to have … PEG ratios than firms with average growth rates.

Answer 12

higher

Question 13

𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 =

Answer 13

𝐷𝑃𝑆 / 𝐸𝑃𝑆

Question 14

Cash Slack is…

Answer 14

When a firm with significant excess cash acquires a firm with great projects but insufficient capital, the combination can create value

Question 15

Debt Capacity Synergy is achived by …

Answer 15

…By combining two firms, each of which has little or no capacity to carry debt, it is possible to create a firm that may have the
capacity to borrow money and create value

Question 16

What are the 4 financial synergies that can be achieved?

Answer 16

1. Diversification
2. Cash Slack
3. Tax benefits
4. Debt Capacity

Question 17

Claim: If there is synergy, the value of the combined firm should be greater than the value of the companies operating independently.

Answer 17

True,

Synergy should increase the combined firm value

Question 18

Claim: Combining two firms with volatile earnings, will increase value because earnings will become more stable after the merger.

Answer 18

False.

Investors can diversify their portfolios themselves

Question 19

Claim: The value of control is greater for a badly managed firm than for a well managed one.

Answer 19

True.

The value of control accrues from the changes that can be made in the firm after taking control of it

Question 20

Claim: The empirical evidence suggests that merger gains are often overstated and fail to materialize in practice.

Answer 20

True

Question 21

Claim: Firms generally become more profitable after mergers, relative to other firms in the industry.

Answer 21

False

Question 22

Amortization in current year is…

Answer 22

0

Question 23

Adjustment to operating income =

Answer 23

Investment in asset this year - Amortization of asset this year