Chapter 4: Q.22I (page 398)
Why do you think the index of consumer expectations is a useful leading indicator of the macro-economy? (See Table 12.2)
Answer
This would lead to expenditure on consumer durables hence an increase in demand and stimulating the economy
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Which of the following is not a governmental structural policy that supply-side economists believe would promote long-term growth in an economy?
a. A redistributive tax system.
b. A promotion of competition.
c. Minimal government interference in the economy.
While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either free cash flow to the firm (FCFF) or free cash flow to equity (FCFE) in her valuation process.
a. State two adjustments that Shaar should make to FCFF to obtain free cash flow to equity.
b. Shaar decides to calculate Rio National’s FCFE for the year 2012, starting with net income. Determine for each of the five supplemental notes given in Table 13.7 whether an adjustment should be made to net income to calculate Rio National’s free cash flow to equity for the year 2012, and the dollar amount of any adjustment.
c. Calculate Rio National’s free cash flow to equity for the year 2012.
In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?
How do each of the following affect the sensitivity of profits to the business cycle?
a. Financial leverage
b. Operating leverage
In what circumstances is it most important to use multistage dividend discount models rather than constant-growth models?
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