Corporate Valuation Methods Flashcards
7 cards from real CPFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Valuation Methods flashcards as text
The weighted average cost of capital (WACC) weights the cost of debt and equity by their:
Answer: Market value proportions in the capital structure
WACC uses the market-value weights of debt and equity in the capital structure.
Why is the cost of debt multiplied by (1 − tax rate) in the WACC formula?
Answer: Interest expense is tax-deductible, providing a tax shield
Interest is deductible, so the after-tax cost of debt is lower than the stated rate.
The Capital Asset Pricing Model (CAPM) estimates the cost of equity as:
Answer: Risk-free rate + beta × equity risk premium
CAPM adds a beta-scaled equity risk premium to the risk-free rate.
A firm with a beta of 1.5 is expected to be:
Answer: More volatile than the overall market
A beta above 1.0 indicates greater systematic risk and volatility than the market.
All else equal, increasing the proportion of low-cost debt in the capital structure will generally:
Answer: Lower WACC up to a point, then raise it as financial risk grows
More cheap debt initially lowers WACC, but excessive leverage eventually raises costs through financial distress risk.
Which input would an analyst most likely use as a proxy for the risk-free rate in a U.S. valuation?
Answer: Yield on 10-year U.S. Treasury notes
Long-term U.S. Treasury yields are the standard proxy for the risk-free rate.
An unlevered (asset) beta is used to:
Answer: Remove the effect of financial leverage before re-levering for a target structure
Unlevering strips out capital-structure effects so beta can be re-levered to a comparable firm's leverage.