Question 1

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90% 
A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90%

Question 2

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 3

Kinkead 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 4

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? $$\begin{array} { l c c } 
& \mathrm { X } & \mathrm { Y } \
\text { Price } & \$ 30 & \$ 30 \
\text { Expected growth (constant) } & 6 \% & 4 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$$

Accepted Answer

A)  Stock Y has a higher dividend yield than Stock X. 
B)  One year from now, Stock X's price is expected to be higher than Stock Y's price. 
C)  Stock X has the higher expected year-end dividend. 
D)  Stock Y has a higher capital gains yield. 
E)  Stock X has a higher dividend yield than Stock Y. 
A)  Stock Y has a higher dividend yield than Stock X. 
B)  One year from now, Stock X's price is expected to be higher than Stock Y's price. 
C)  Stock X has the higher expected year-end dividend. 
D)  Stock Y has a higher capital gains yield. 
E)  Stock X has a higher dividend yield than Stock Y.

Question 5

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return.Which of the following statements is CORRECT?

Accepted Answer

A)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
B)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
C)  The two stocks must have the same dividend growth rate. 
D)  The two stocks must have the same dividend yield. 
E)  The two stocks must have the same dividend per share. 
A)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
B)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
C)  The two stocks must have the same dividend growth rate. 
D)  The two stocks must have the same dividend yield. 
E)  The two stocks must have the same dividend per share.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B)  The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C)  The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
D)  The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time. 
E)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. 
A)  If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B)  The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C)  The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
D)  The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time. 
E)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

Question 7

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%.What is Jameson's current stock price, P0?

Accepted Answer

A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55 
A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 9

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

A)  $23.11 
B)  $23.70 
C)  $24.31 
D)  $24.93 
E)  $25.57 
A)  $23.11 
B)  $23.70 
C)  $24.31 
D)  $24.93 
E)  $25.57

Question 10

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)  The stock's dividend yield is 5%. 
B)  The price of the stock is expected to decline in the future. 
C)  The stock's required return must be equal to or less than 5%. 
D)  The stock's price one year from now is expected to be 5% above the current price. 
E)  The expected return on the stock is 5% a year. 
A)  The stock's dividend yield is 5%. 
B)  The price of the stock is expected to decline in the future. 
C)  The stock's required return must be equal to or less than 5%. 
D)  The stock's price one year from now is expected to be 5% above the current price. 
E)  The expected return on the stock is 5% a year.

Question 11

Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE).She asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share.Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter.Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis:    Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV.She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek.What is the value of rs?

Accepted Answer

A)  11.84% 
B)  12.21% 
C)  12.58% 
D)  12.97% 
E)  13.36% 
A)  11.84% 
B)  12.21% 
C)  12.58% 
D)  12.97% 
E)  13.36%

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  The free cash flow valuation model, Vops =FCF1/(WACC − g), cannot be used for firms that have negative growth rates. 
D)  The free cash flow valuation model, Vops = FCF1/(WACC − g), can be used only for firms whose growth rates exceed their WACC. 
E)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  The free cash flow valuation model, Vops =FCF1/(WACC − g), cannot be used for firms that have negative growth rates. 
D)  The free cash flow valuation model, Vops = FCF1/(WACC − g), can be used only for firms whose growth rates exceed their WACC. 
E)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

Question 13

Based on the free cash flow valuation model, the value of Weidner Co.'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 Weidner 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

Question 14

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock, rs, is 11.50%.What is the stock's expected price 5 years from now?

Accepted Answer

A)  $40.17 
B)  $41.20 
C)  $42.26 
D)  $43.34 
E)  $44.46 
A)  $40.17 
B)  $41.20 
C)  $42.26 
D)  $43.34 
E)  $44.46

Question 15

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years, i.e., what is $\tilde { \mathrm { P } } _ { 7}$ ?

Accepted Answer

A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61 
A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61

Question 16

The free cash flows (in millions) shown below are forecast by Parker & Sons.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). $$\begin{array} { l c c } 
\text { Year: } & 1 & 2 \
\hline  \text { Free cash flow: } & - \$ 50 & \$ 100
\end{array}$$

Accepted Answer

A)  $1,456 
B)  $1,529 
C)  $1,606 
D)  $1,686 
E)  $1,770 
A)  $1,456 
B)  $1,529 
C)  $1,606 
D)  $1,686 
E)  $1,770

Question 17

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 18

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34% 
A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34%

Question 19

Gere Furniture 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

Which of the following statements is CORRECT?

Accepted Answer

A)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
B)  Corporations cannot buy the preferred stocks of other corporations. 
C)  Preferred dividends are not generally cumulative. 
D)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
E)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
A)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
B)  Corporations cannot buy the preferred stocks of other corporations. 
C)  Preferred dividends are not generally cumulative. 
D)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
E)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

Exam 7: Corporate Valuation and Stock Valuation

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price \ 30 \ 30 Expected growth (constant) 6\% 4\% Required return 12\% 10\%

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%.What is Jameson's current stock price, P0?

Which of the following statements is CORRECT?

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%.What is the current stock price?

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Which of the following statements is CORRECT?

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock, rs, is 11.50%.What is the stock's expected price 5 years from now?

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years, i.e., what is P~7\tilde { \mathrm { P } } _ { 7}P~7​ ?

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Gere Furniture 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?

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters

If D₁ = $1.50, g (which is constant) = 6.5%, and P₀ = $56, what is the stock's expected capital gains yield for the coming year?

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%.What is Jameson's current stock price, P₀?

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%, and the constant growth rate is g = 4.0%.What is the current stock price?

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock, r_s, is 11.50%.What is the stock's expected price 5 years from now?

Connolly Co.'s expected year-end dividend is D₁ = $1.60, its required return is r_s = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years, i.e., what is $\tilde { \mathrm { P } } _ { 7}$ ?

If D₁ = $1.25, g (which is constant) = 5.5%, and P₀ = $44, what is the stock's expected total return for the coming year?