ABV Exam Ch 5 Questions & Answers 2024/2025
Which does not explain cost of capital?
a. return one expects and requires from his investment in a company's debt or equity
b. discount rate that should be used to reduce future cash flows down to present value
c. economic cost to the company o...
a. return one expects and requires from his investment in a company's debt or equity
b. discount rate that should be used to reduce future cash flows down to present value
c. economic cost to the company of attracting and retaining capital in a competitive environment
d. the company's systematic risk + company's specific risk under the modified CAPM - ANSWERSd.
company's systematic risk + company's specific risk under modified CAPM.
that's not the formula...
modified CAPM = beta(ERP) + risk free rate + small co. premium + specific co. premium
Which component is added to CAPM to adapt it for use in valuing a standalone company? -
ANSWERSUnsystematic risk, or idiosyncratic risk.
this can be through the beta or through the specific company premium...
What is one of the primary advantages in using Duff & Phelps report?
a. incorporates longer time frame of historical returns compared to SBBI
b. eliminates the need to determine the risk free rate
c. incorporates a method for addressing company size other than market capitalization
d. allows the appraiser to estimate required returns by using the subject company's gross profits -
ANSWERSc. incorporates a way to address company size other than market cap.
, T/F: The estimated required rate of return on equity developed using SBBI data is typically considered to
be a minority return, because the risk premiums were derived from minority share transactions. -
ANSWERSFalse.
T/F: The estimated required rate of return on equity developed using SBBI data is generally considered to
be applicable to nominal income measures, rather than real (inflation removed) income measures. -
ANSWERSTrue
T/F: the estimated required rate of return from SBBI is typically considered to be applicable to net cash
flow to equity, unless an adjustment is considered to convert the result to be applicable to another
income measure. - ANSWERSTrue
T/F: the required rate of return on equity is typically using the 20-year treasury bond rate as of the
valuation date as the risk-free rate. - ANSWERSTrue
Which investment requires the highest rate of return?
a. venture capital
b. treasury bills
c. junk bonds
d. small cap stocks - ANSWERSa. venture capital
What should be the weights applied to debt and equity in calculating the WACC under fair market value?
a. subject company's current capital structure when valuing a controlling interest in the company
b. optimal capital structure when valuing a minority interest in the company
c. subject company's accounting book values of debt and equity
d. market values of debt and equity, regardless of whether a minority or controlling interest is being
appraised - ANSWERSd. market values of debt and equity, regardless of whether a minority or controlling
interest is being appraised
Which risk factor is considered to be systematic risks?
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