Chapter 11, Problem 2QE

Discuss the strength and weaknesses of cash-flow based valuation models. How do variations in the required cost of capital for debt and equity shareholders affect valuation?

Explain the theory behind the free cash flow valuation approach. Why are the free cash flows value relevant to common equity shareholders when they are not cash flows to those shareholders, but rather are cash flows into the firm?

1.Which of the following is not something that you would consider when evaluating the optimal capital structure? d. Security Rating. b. EBIT-EPS Analysis. a. Agency Costs. f. Neither the second nor fourth answer is correct. c. Taxes. e. All of the above are considered when determining the optimal capital structure. 2.Which of the following is an argument for the relevance of dividends? b. Reduction of uncertainty. a. Informational content. c. Some investors' preference for current income. d. All of the above. 3.All of the following are true of stock splits EXCEPT: a. Market price per share is reduced after the split. d. Proportional ownership is unchanged. b. The number of outstanding shares is increased. c. Retained earnings are changed.

The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the future value of cash flows. Is this true or false?

what is the need to conduct the Solvency Analysis when the liquidity analysis serves the purpose of checking the cash position and liability paying condition of the company? What does PE Ratio tell the investors? Is there any difference between PE ratio, EPS and DPS (Dividend per Share), what insights both ratios provide to the investors? Which category of stakeholders rely on these two ratios? What is the difference between DPS and Dividend Yeild? answer full question please

Cost of Capital' concept and its importance in the valuation of common stocks. How is the concept utilized in practice? Are there any deficiencies or inconsistencies in current practice?

How should (a) signaling and (b) the clienteleeffect be taken into account by a firm as it considers its dividend decision? Do signaling and clientele effects make it easier or harder to determineif investors prefer high or low payout ratios? Dothese factors influence the desirability of a stabledistribution policy versus one that is flexible andthus varies with the company’s cash flows andinvestment opportunities?

1. Is a solvent firm necessarily liquid? Why? 2. Explain the difficulties for determining the cost of capital in the short-term decision-making. 3. Explain the difference between the financial statement approach and the valuation approach. Which approach is superior for making short-term financial decisions? Why?