Reading Quiz Chapters 12 and 13 Name________________

Please answer the following questions.

1. A (small, normal, or large) amount of the present value is accounted for in the continuing value of a typical corporation. Pick one.

2. When calculating the continuing value using multiples, should you use the multiple now or the expected multiple at the end of the forecast period?

3. What is naïve over-conservatism?

4. Do competitive advantage and the forecast period necessarily end at the same time? Explain.

5. Our business has growing at 10%, 8% and 6% the last 3years and this grow will transition to 3% in the continuing value period. During these years the additional investment in working capital was $100,000 then $83,000 then $66,000. When projecting the level of additional dollar investment in working capital should this number be higher than or less than $66,000 as the firm is transitioning into the continuing value period?

6. How would an investment grade company estimate its pretax cost of debt if their bonds are actively traded?

7. What is one common liability that is not considered a source of capital in calculating the weights for use in the weighted average cost of capital?

8. Should we use book weights, market weights or target weights when calculating the weighting for the weighted average cost of capital?

9. When calculating the cost of each component of capital, do we use the pre tax cost or the after tax cost?

10. When using the CAPM should we use a short term interest rate for the risk free rate or a long term interest rate?

11. The author mentions several ways to improve the predictive power of beta. What is one way to do this?