Q&A Hero

Q: Growth rates can be calculated based on the historical experience of the firm or industry. True or False

Q: The variable growth model would be most appropriate for valuing firms in the growth phase of their product life cycle. True or False

Q: Which of the following functions are not performed by any of the twelve regional Federal Reserve banks? A) Check clearing B) Conducting economic research C) Setting interest rates payable on time deposits D) Issuing new currency

Q: The constant growth model is most applicable to firms in mature markets. True or False

Q: Which of the following is not an entity of the Federal Reserve System? A) Federal Reserve banks B) The FDIC C) The Board of Governors D) The Federal Advisory Council E) Member commercial banks

Q: Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FOMC D) All of the above

Q: The enterprise or free cash flow to the firm approach to valuation discounts the after-tax free cash flow available to the firm from operations at the weighted average cost of capital to obtain the enterprise value. True or False

Q: Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FDIC D) All of the above E) Only A and B of the above

Q: Free cash flow to the firm is often called enterprise cash flow. True or False

Q: The many regional Federal Reserve banks resulted from a compromise between parties favoring A) the establishment of a central bank and those opposed to its establishment. B) a private central bank and those favoring a government institution. C) the establishment of the Board of Governors in Washington, D.C., and those preferring its establishment in New York City. D) none of the above.

Q: Beta is a measure of non-diversifiable risk. True or False

Q: Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been avoided had A) the First Bank of the United States served its intended role of lender of last resort. B) the Second Bank of the United States not been abolished in 1836 by President Andrew Jackson. C) the Second Bank of the United States served its intended role of lender of last resort. D) the Federal Reserve served its intended role of lender of last resort.

Q: When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firms market value. True or False

Q: The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that A) the First Bank of the United States had failed to serve as a lender of last resort. B) the Second Bank of the United States had failed to serve as a lender of last resort. C) the Federal Reserve System had failed to serve as a lender of last resort. D) a central bank was needed to prevent future panics.

Q: Net debt is defined as all of the firms interest bearing debt less the value of cash and marketable securities. True or False

Q: The traditional American distrust of moneyed interests and the fear of centralized power help to explain A) the failures of the first two experiments in central banking in the United States. B) the decentralized structure of the Federal Reserve System. C) why the Board of Governors of the Federal Reserve System is not located in New York. D) all of the above. E) only A and B of the above.

Q: In the absence of debt, b measures the volatility of a firms financial return to changes in the general markets overall financial return. True or False

Q: Both public and private firms are subject to non-diversifiable risk. True or False

Q: The unusual structure of the Federal Reserve System is perhaps best explained by A) Americans' fear of centralized power. B) the traditional American distrust of moneyed interests. C) Americans' desire to remove control of the money supply from the U.S. Treasury. D) all of the above. E) only A and B of the above.

Q: Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that A) the Federal Reserve needed greater control over the banking system. B) the Federal Reserve needed greater authority to deal with problem banks. C) a central bank was needed to prevent future financial panics. D) both A and B of the above.

Q: According to the capital asset pricing model, risk consists of both diversifiable and non-diversifiable components. True or False

Q: Americans' fear of centralized power and their distrust of moneyed interests explain why the U.S. did not have a central bank until the A) 17th century. B) 18th century. C) 19th century. D) 20th century.

Q: The cost of capital formula can be generalized to include hybrid sources of funds available to firms such as convertible preferred and debt. True or False

Q: Discuss similarities and differences between Ben Bernanke and Alan Greenspan in their respective roles as chairman of the Federal Reserve Board.

Q: The weights used to calculate the weighted average cost of capital for a firm with common equity and debt only represent the book value of equity and debt. True or False

Q: Describe the structure and responsibility for policy tools in The Federal Reserve System.

Q: The after-tax cost of borrowed funds to the firm is estimated by multiplying the pretax interest rate, i, by (1 t), where t is the marginal tax rate for the firm. True or False

Q: In recent years, has Fed policymaking become more or less transparent? Why?

Q: The weighted average cost of capital consists only of debt and equity. True or False

Q: What is the theory of bureaucratic behavior? What types of behavior does it predict the Fed might undertake?

Q: Viewing preferred dividends as paid in perpetuity, the cost of preferred stock can be calculated as dividends per share of preferred stock divided by the market value of the preferred stock. True or False

Q: What are the arguments for and against an independent Fed?

Q: Preferred stock exhibits some of the characteristics of long-term debt in that its dividend is generally constant and preferred stockholders are paid before common shareholders in the event the firm is liquidated. True or False

Q: The size factor used to adjust the capital asset pricing model serves as a proxy for factors such as smaller firms being subject to higher default risk and generally being less liquid than large capitalization firms. True or False

Q: What factors limit the independence of the Federal Reserve?

Q: What are the factors that promote the independence of the Federal Reserve?

Q: Studies show that it is generally unnecessary to adjust the capital asset pricing model for the size of the firm. True or False

Q: Former Board of Governors chairman Paul Volcker reportedly once said that the Federal Reserve is free to pursue any policy it desires, as long as it convinces Congress that such a policy is reasonable. What does Volcker's comment suggest about the independence of the Fed? Explain.

Q: If an investor anticipates a future cash flow stream of five or ten years, she needs to use either a five- or ten-year Treasury bond rate as the risk-free rate. True or False

Q: Former Congressman Jack Kemp reportedly once said that he wanted to become the most powerful man in Washington, D.C.the chairman of the Board of Governors of the Federal Reserve System. What does Representative Kemp's comment imply about the power of the chairman of the Federal Reserve? Do you think he may have been exaggerating? Explain.

Q: A risk-free rate of return is one for which the expected return is certain. True or False

Q: The FOMC does not actually carry out securities purchases or sales.

Q: Free cash flow to the firm is also called enterprise cash flow. True or False

Q: The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System.

Q: A firms beta is affected by the amount of debt a firm maintains relative to its equity. True or False

Q: The Fed has goal independence but not instrument independence.

Q: Interest payments are tax deductible to firms in the U.S. True or False

Q: Announcing the FOMC's policy decision immediately after the FOMC meeting is an example of how Fed policymaking has become more transparent.

Q: The capital asset pricing model is commonly used to estimate the cost of equity. True or False

Q: The cost of equity is the minimum financial return required by investors to invest in stocks of comparable risk. True or False

Q: Countries with more independent central banks have lower inflation rates, but these have come at the expense of greater output fluctuations.

Q: The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk. True or False

Q: Why was the shadow banking system important during the 2007-2009 U.S. financial crisis?

Q: Discuss some of the financial innovations in mortgage markets that led to the U.S. financial crisis in 2007.

Q: It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firms outstanding shares. True or False

Q: What does the "twin crises" in an emerging economy financial crisis refer to?

Q: The estimation of present value using the constant growth model involves the calculation of a terminal value. True or False

Q: In the second stage of a financial crisis in an emerging economy, a speculative currency attack begins. Why can't the government defend itself from such an attack?

Q: The constant growth valuation model is primarily applicable to firms in mature markets. True or False

Q: In an emerging market economy, a lending boom and crash are not inevitable outcomes of financial liberalization and globalization. Discuss when a boom and crash will occur, and how it can be avoided.

Q: If free cash flow to the firm is expected to remain at $10 million indefinitely and the firms cost of equity is .10, the present value of the firm is $100 million. True or False

Q: Discuss why some view the Fed as a culprit in the U.S. housing bubble during the 2000s.

Q: Free cash flow to equity is calculated using operating income. True or False

Q: Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.

Q: Free cash flow to the firm is calculated before debt and taxes. True or False

Q: What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis?

Q: In the absence of debt, the unlevered beta measures the volatility of the firms financial return to changes in the general stock markets overall return. True or False

Q: Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.

Q: A beta coefficient is a measure of a firms diversifiable risk. True or False

Q: Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.

Q: In calculating the weighted average cost of capital, the weights should be estimated using the market value of the target firms debt and equity. True or False

Q: Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline.

Q: Assume the acquirer divests all of Fairmonts hotels and real estate properties but continues to manage the hotels and properties under long-term management contracts. How would you estimate the net present value of the acquisition of Fairmont to the acquirer? Explain your answer.

Q: In the second stage of a financial crisis in an emerging economy, foreign exchange markets start placing huge bets that there will be an appreciation of the emerging market country's currency.

Q: Is it reasonable to assume that the acquirer could actually be getting the operation for free, since the value of the real estate per share is worth more than the purchase price per share? Explain your answer.

Q: Because asset markets are relatively small in an emerging market, they play less of a prominent role in a financial crisis in those economies.

Q: Assume the acquirer divests all of Fairmont's hotels and real estate properties but continues to manage the hotels and properties under long-term management contracts. How would you estimate the net present value of the acquisition of Fairmont to the acquirer? Explain your answer.

Q: In an emerging market economy, a lending boom and crash are inevitable outcomes of financial liberalization and globalization.

Q: Is it reasonable to assume that the acquirer could actually be getting the operation for "free," since the value of the real estate per share is worth more than the purchase price per share? Explain your answer.

Q: In an emerging market economy, the financial globalization process further weakens the credit culture by allowing domestic banks to borrow abroad.