1. Which of the following is not a problem with using a dividend-based valuation formula?
   a.
   Dividends are arbitrarily established.
   b.
   Dividends represent a transfer of wealth to shareholders.
   c.
   Some firms do not pay a regular periodic dividend.
   d.
   It is a challenge to forecast the final liquidating dividend.

b.
Dividends represent a transfer of wealth to shareholders.

2. . One rationale for using expected dividends in valuation is:
   a.
   Dividends are a necessary payment in order for a firm to have value.
   b.
   Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
   c.
   Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
   d.
   Dividend payout ratios are set based on profitability.

b.
Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.

3. Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except:
   a.
   Share prices in the capital markets generally correlate closely with share value.
   b.
   Share prices do not always equal share values.
   c.
   Temporary deviations of price from value occur.
   d.
   Unexpected changes in earnings, dividends, and cash flows do not correlate closely
   with changes in stock prices.

d.
Unexpected changes in earnings, dividends, and cash flows do not correlate closely
with changes in stock prices.

4. If an analyst wants to value a potential investment in the common stock equity of a firm, the analyst should discount the projected free cash flows at the
   a.
   required return on equity capital
   b.
   weighted average cost of capital
   c.
   risk free rate
   d.
   market risk premium

a.
required return on equity capital

5. . Free cash flow is calculated as net cash provided by operating activities less
   a.
   dividends.
   b.
   capital expenditures and depreciation.
   c.
   capital expenditures.
   d.
   capital expenditures and dividends.

d.
capital expenditures and dividends.

6. Net cash flow from operations -________________ -dividends equals_______________________

cap expenditures
= free cash flow

7. ________________ is an estimate of systematic risk based on the degree of covariation between a firm's stock returns and an index of stock returns for all firms in the market.

market beta

8. What three elements are needed to value a resource when using cash flows?

1. the expected future free cash flows over the forecast horizon
2. the expected future free cash flows at the final period of the forecast horizon
3. the discount rate used to compute the present value of the future cash flows

9. Which of the following statements is NOT CORRECT?
   
   a.
   The free cash flow valuation model discounts free cash flows by the required return on equity.
   
   b.
   The free cash flow valuation model can be used to find the value of a division.
   
   c.
   An important step in applying the free cash flow valuation model is forecasting the firm's pro forma financial statements.
   
   d.
   Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.
   
   e.
   The free cash flow valuation model can be used both for companies that pay dividends and those that do not pay dividends.

a.
The free cash flow valuation model discounts free cash flows by the required return on equity.