Exam 9: Stocks and Their Valuation

Two conditions are used to determine whether a stock is in equilibrium: (1)Does the stock's market price equal its intrinsic value as seen by the marginal investor,and (2)does the expected return on the stock as seen by the marginal investor equal his or her required return? If either of these conditions,but not necessarily both,holds,then the stock is said to be in equilibrium.

Kale Inc.forecasts the free cash flows (in millions)shown below.Assume the firm has zero non-operating assets.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,then what is the firm's total corporate value (in millions)? Do not round intermediate calculations. Year 1 2 Free Cash flow -\ 50 \ 115 ?

Your boss,Sally Maloney,treasurer of Fred Clark Enterprises (FCE),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 $17.50 per share.Sally 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.Sally asked you to use that information to estimate the required rate of return on the stock,r_s,and she provided you with the following template for use in the analysis. ? Sally 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 HV.She also notes that the estimated value for r_s,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 r_s.The value of r_s that causes the calculated price to equal the actual price is the correct one.She notes,though,that this trial-and-error process is quite tedious,and that the correct r_s could be found much faster with a simple Excel model,especially if you use Goal Seek.What is the value of r_s?

A share of common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 14.2%,then what is the stock price?

Sorenson Corp.'s expected year-end dividend is D₁ = $4.00,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 Sorenson's expected stock price in 7 years,i.e. ,what is $\tilde { P } _ { 7 }$ ? Do not round intermediate calculations.

Schnusenberg Corporation just paid a dividend of D₀ = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.70,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price? Do not round intermediate calculations.

The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 24% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s)is 12%.What is the best estimate of the current stock price? Do not round intermediate calculations.

If a stock's expected return as seen by the marginal investor exceeds his or her required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

The corporate valuation model can be used only when a company doesn't pay dividends.

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $500 million.Its balance sheet shows $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 its stock price per share?

Preferred stock is a hybrid-a cross between a common stock and a bond-in the sense that it pays dividends that normally increase annually (like a stock),but its payments are contractually guaranteed (like interest on a bond).

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 \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\% ?

Wall Inc.forecasts that it will have the free cash flows (in millions)shown below.Assume the firm has zero non-operating assets.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions? Do not round intermediate calculations. Year 1 2 3 Free cash flow -\ 20.00 \ 48.00 \ 50.50 ?

The preemptive right is important to shareholders because it

Which of the following statements is CORRECT?

If D₁ = $1.25,g (which is constant)= 4.7%,and P₀ = $22.00,then what is the stock's expected dividend yield for the coming year?

You have been assigned the task of using the corporate,or free cash flow,model to estimate Petry Corporation's intrinsic value.The firm's WACC is 10.00%,its end-of-year free cash flow (FCF₁)is expected to be $70.0 million,the FCFs are expected to grow at a constant rate of 5.00% a year in the future,the company has $200 million of long-term debt and preferred stock,and it has 30 million shares of common stock outstanding.Assume the firm has zero non-operating assets.What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations.

An increase in a firm's expected growth rate would cause its required rate of return to

Nachman Industries just paid a dividend of D₀ = $3.75.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value? Do not round intermediate calculations.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.