Example 1 in the chapter, based on a study of Intel Corporation that used a present value model (Cornell 2001), examined what future revenue growth rates were consistent with Intel's stock price of $61.50 just prior to its earnings announcement, and $43.31 only five days later. The example states, "Using a conservatively low discount rate, Cornell estimated that Intel's price before the announcement, $61.50, was consistent with a forecasted growth rate of 20 per-cent a year for the subsequent 10 years and then 6 percent per year thereafter." Choose all correct responses which reflect the implications of using a higher discount rate than Cornell did.

If Cornell had used a higher discount rate, the implied growth rate consistent with a price of $61.50 would have been higher than the 20 percent growth rate estimated by Cornell.

If Cornell had used a higher discount rate, the implied growth rate consistent with a price of $61.50 would have been below the 20 percent growth rate estimated by Cornell.

If Cornell had used a higher discount rate, he would have needed to project a higher level of assumed future cash flows than he did for their present value to have been consistent with the given pre-announcement price of $61.50.

If one increased the discount rate, one would also need to increase the cash flow if a constant present value were to be maintained.

If Cornell had used a higher discount rate, he would not have needed to project a higher level of assumed future cash flows than he did for their present value to have been consistent with the given pre-announcement price of $61.50.

Which of the following would explain how understanding a company's business (the first step in equity valuation) might be useful in performing a sensitivity analysis related to a valuation of the company. (choose all which are correct)

An understanding of the company's business highlights the critical inputs to a forecast.

An understanding of the company's business facilitates a focus on the key business aspects that affect value.

Facilitating a company's key focus on business aspects highlights understanding affecting inputs.

In a research note on the ordinary shares of the Milan Fashion Group (MFG) dated early July 2007 when a recent price was 7.73 and projected annual dividends were 0.05, an analyst stated a target price of 9.20. The research note did not discuss how the target price was obtained or how it should be interpreted. Assume the target price represents the expected price of MFG. What further specific pieces of information would you need to form an opinion on whether MFG was fairly valued, overvalued, or undervalued? (choose all which are correct)

You need to know the opinion of other analysts before you come to a conclusion.

You need to know the industry median P/E ratio before you come to a conclusion.

You need to know the time horizon for the price target before you come to a conclusion.

You need to know the required rate of return on MFG before you come to a conclusion.