Question 1

ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.

Accepted Answer

A) True 
 B)False  True

Question 2

Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.

Accepted Answer

A) True 
 B)False  False

Question 3

Based on the corporate valuation model, the value of a company's operations is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

Accepted Answer

A)  $24.90 
B)  $27.67 
C)  $30.43 
D)  $33.48 
E)  $36.82 
A)  $24.90 
B)  $27.67 
C)  $30.43 
D)  $33.48 
E)  $36.82 B

Question 4

Suppose Yon Sun Corporation's free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

Accepted Answer

A)  $948 
B)  $998 
C)  $1,050 
D)  $1,103 
E)  $1,158 
A)  $948 
B)  $998 
C)  $1,050 
D)  $1,103 
E)  $1,158

Question 5

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

Accepted Answer

A)  Abnormally high executive compensation. 
B)  Targeted share repurchases. 
C)  Shareholder rights provisions. 
D)  Restricted voting rights. 
E)  Poison pills. 
A)  Abnormally high executive compensation. 
B)  Targeted share repurchases. 
C)  Shareholder rights provisions. 
D)  Restricted voting rights. 
E)  Poison pills.

Question 6

Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?

Accepted Answer

A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193 
A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193

Question 7

Based on the corporate valuation model, the value of a company's operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock's price per share?

Accepted Answer

A)  $23.00 
B)  $25.56 
C)  $28.40 
D)  $31.24 
E)  $34.36 
A)  $23.00 
B)  $25.56 
C)  $28.40 
D)  $31.24 
E)  $34.36

Question 8

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

Accepted Answer

A)  To increase worker productivity. 
B)  To enable the firm to borrow at a below-market interest rate. 
C)  To make it easier to grant stock options to employees. 
D)  To help prevent a hostile takeover. 
E)  To help retain valued employees. 
A)  To increase worker productivity. 
B)  To enable the firm to borrow at a below-market interest rate. 
C)  To make it easier to grant stock options to employees. 
D)  To help prevent a hostile takeover. 
E)  To help retain valued employees.

Question 9

Based on the corporate valuation model, Hunsader's value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

Accepted Answer

A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80 
A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80

Question 10

Which of the following does NOT always increase a company's market value?

Accepted Answer

A)  Increasing the expected growth rate of sales. 
B)  Increasing the expected operating profitability (NOPAT/Sales). 
C)  Decreasing the capital requirements (Capital/Sales). 
D)  Decreasing the weighted average cost of capital. 
E)  Increasing the expected rate of return on invested capital. 
A)  Increasing the expected growth rate of sales. 
B)  Increasing the expected operating profitability (NOPAT/Sales). 
C)  Decreasing the capital requirements (Capital/Sales). 
D)  Decreasing the weighted average cost of capital. 
E)  Increasing the expected rate of return on invested capital.

Question 11

Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 12

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Accepted Answer

A) True 
 B)False

Question 13

Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

Accepted Answer

A)  $719 
B)  $757 
C)  $797 
D)  $839 
E)  $883 
A)  $719 
B)  $757 
C)  $797 
D)  $839 
E)  $883

Question 14

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

A) True 
 B)False

Question 15

A poison pill is also known as a corporate restructuring.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. 
A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

Question 17

Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Accepted Answer

A)  $1,714,750 
B)  $1,805,000 
C)  $1,900,000 
D)  $2,000,000 
E)  $2,100,000 
A)  $1,714,750 
B)  $1,805,000 
C)  $1,900,000 
D)  $2,000,000 
E)  $2,100,000

Question 18

If a company's expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA).

Accepted Answer

A) True 
 B)False

Question 19

Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Accepted Answer

A)  $840 
B)  $882 
C)  $926 
D)  $972 
E)  $1,021 
A)  $840 
B)  $882 
C)  $926 
D)  $972 
E)  $1,021

Question 20

The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.

Accepted Answer

A) True 
 B)False

Exam 11: Corporate Valuation and Value-Based Management

ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.

Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.

Suppose Yon Sun Corporation's free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

Which of the following does NOT always increase a company's market value?

Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate.

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

A poison pill is also known as a corporate restructuring.

Which of the following statements is NOT CORRECT?

Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

If a company's expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA).

Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

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