INV3701 EXAM PACK

. Excess risk adjusted return is also called … 1. beta. 2. theta. 3. alpha. An excess risk - adjustment return is also called an abnormal return or alpha. Alpha = expected return - Required return S - The study-notes marketplace Downloaded by: tomchandla | Distribution of this document is illegal S - The study-notes marketplace For an active investment manager, valuation is an inherent part of the attempt to produce investment returns that exceed the returns commensurate with the investment’s risk; that is, positive excess risk-adjusted returns. 2. An analyst has been instructed to use absolute valuation models and not relative valuation models in her analysis. Which of the following is least likely to be an example of an absolute valuation model? 1. residual income model 2. dividend discount model 3. price-to-earnings market multiple model Absolute equity valuation models are present value models. These models specify the intrinsic value of an asset. Dividend discount valuation models; Residual income model; FCFF and FCFE are all absolute valuation models. Relative valuation models estimate an asset’s value relative to that of another asset. The idea is that similar assets should sell at similar prices, and typically implemented using price multiples (P/E, P/B, P/S) 3. Which one of the following statements is most likely correct with regard to steps and activities/actions in the equity valuation process? 1. An analyst applies the valuation conclusions by choosing the FCFE model. 2. To convert his forecast into a valuation, an analyst carried out a sensitivity analysis. 3. To understand the business, an analyst helped the firm he is evaluating compile their financial statements. To convert forecast into valuation, analysts use sensitivity analysis Sensitivity analysis is an analysis to determine how changes in an assumed input would affect the outcome. For example, a sensitivity analysis can be used to assess how a change in assumptions about a company’s future growth—for example, decomposed by sales growth forecasts and margin forecasts—and/or a change in discount rates would affect the estimated value. 4. A positive return from convergence of price to intrinsic value would most likely occur if… 1. expected return is greater than required return. 2. required return is greater than expected return. 3. required return equals expected return. Downloaded by: tomchandla | Distribution of this document is illegal S - The study-notes marketplace Expected alpha = Expected return – Required return (undervalued - buy asset) 5. Assume Greenfield Corp listed its preferred shares on the JSE in 2014. They pay an annual dividend of R6.10 and the required rate of return is 5.80%. The market growth rate which is independent from company growth rate is 5% and estimated beta is currently 0.60. The market return is 6%. The value of the p