Question 1

One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 2

According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm buys back its shares.

Accepted Answer

A) True 
 B)False

Question 3

Turnarounds are firms with valuable assets that are hidden on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 14.3
Use the Information Below for the Following Problem(S)
Harcourt Industries currently has an 18% annual growth rate while the market average is 8 percent. The market multiple is 12.
-Refer to Exhibit 14.3.Determine the justified P/E ratio for Harcourt Industries assuming Harcourt can maintain its superior growth rate for the next 9 years.

Accepted Answer

A)  5.98 
B)  13.13 
C)  21.20 
D)  58.68 
E)  26.65 
A)  5.98 
B)  13.13 
C)  21.20 
D)  58.68 
E)  26.65

Question 5

When using the Present Value of Operating Free Cash Flow model,the firm's operating free cash flow to the firm is discounted by the firm's:

Accepted Answer

A)  Cost of equity 
B)  Cost of debt 
C)  Required rate of return 
D)  Weighted Average Cost of Capital 
E)  Beta-adjusted cost of equity 
A)  Cost of equity 
B)  Cost of debt 
C)  Required rate of return 
D)  Weighted Average Cost of Capital 
E)  Beta-adjusted cost of equity

Question 6

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-You are provided with the following information about Javier Corporation.Sales for the year 2010 were $500,000,the Net Profit Margin (NPM)was 15%.Analysts project sales to grow by 12% next year (that is 2011).However,because of more competition,the NPM is expected to decline by 10% for the year 2010.The expected P/E multiple for the year 2011 is 22.The total number of shares outstanding is 20,000.Use the earnings multiplier model to calculate the expected price for Javier Corporation in the year 2011.

Accepted Answer

A)  $74.25 
B)  $61.6 
C)  $82.5 
D)  $83.16 
E)  $101.64 
A)  $74.25 
B)  $61.6 
C)  $82.5 
D)  $83.16 
E)  $101.64

Question 7

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the total intrinsic value of the firm.

Accepted Answer

A)  $19,644,612 
B)  $15,558,546 
C)  $17,327,250 
D)  $20,830,412 
E)  $10,779,025 
A)  $19,644,612 
B)  $15,558,546 
C)  $17,327,250 
D)  $20,830,412 
E)  $10,779,025

Question 8

The Pekay Company has FCFE of $800.FCFE is expected to grow by 7% next year.The cost of capital is 7% and the level of debt is $4000.The number of shares outstanding is 700.Calculate the firm's share price.

Accepted Answer

A)  $44.25 
B)  $65.12 
C)  $38.19 
D)  $40.76 
E)  $50.56 
A)  $44.25 
B)  $65.12 
C)  $38.19 
D)  $40.76 
E)  $50.56

Question 9

A firm that follows a defensive competitive strategy could

Accepted Answer

A)  Lower production costs. 
B)  Create a strong brand image. 
C)  Use its buying power to obtain price concessions. 
D)  a and b 
E)  b and c 
A)  Lower production costs. 
B)  Create a strong brand image. 
C)  Use its buying power to obtain price concessions. 
D)  a and b 
E)  b and c

Question 10

Operating free cash flow and Free cash flow to equity are equivalent cash flow concepts.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-Based on the information provided,calculate the intrinsic value in 2010 of a share of INV Corp.using the Present Value of Earnings Model (infinite holding period).For 2010 net income was $250,000,total debt was $50,000,and there were 206,263 shares outstanding.The required rate of return is 12% and the estimated growth rate in earnings is 5.5%.

Accepted Answer

A)  $19.43 
B)  $23.98 
C)  $28.52 
D)  $22.73 
E)  $15.50 
A)  $19.43 
B)  $23.98 
C)  $28.52 
D)  $22.73 
E)  $15.50

Question 12

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the required rate of return on equity.

Accepted Answer

A)  5% 
B)  9.2% 
C)  10.2% 
D)  10% 
E)  4.3% 
A)  5% 
B)  9.2% 
C)  10.2% 
D)  10% 
E)  4.3%

Question 13

The expected rate of return on Research Industries is twice the 12 percent expected rate of return from the market.What is Research's beta if the risk free rate is 6 percent?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5 
E)  6 
A)  2 
B)  3 
C)  4 
D)  5 
E)  6

Question 14

Defensive companies are firms where

Accepted Answer

A)  Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy. 
B)  Sales, earnings and cash flows are likely to withstand changes caused by the economic environment. 
C)  Sales, earnings and cash flows are heavily influenced by aggregate business activity. 
D)  Sales, earnings and cash flows are growing exponentially. 
E)  None of the above. 
A)  Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy. 
B)  Sales, earnings and cash flows are likely to withstand changes caused by the economic environment. 
C)  Sales, earnings and cash flows are heavily influenced by aggregate business activity. 
D)  Sales, earnings and cash flows are growing exponentially. 
E)  None of the above.

Question 15

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the adjusted operating profits before taxes.

Accepted Answer

A)  $586.5 
B)  $225.64 
C)  $825.23 
D)  $831.56 
E)  $692.5 
A)  $586.5 
B)  $225.64 
C)  $825.23 
D)  $831.56 
E)  $692.5

Question 16

Exhibit 14.2
Use the Information Below for the Following Problem(S)
Modular Industries currently has a 16% annual growth rate while the market average is 6 percent. The market multiple is 10.
-Refer to Exhibit 14.2.Determine the P/E ratio for Modular Industries assuming Modular can maintain its superior growth rate for the next 8 years.

Accepted Answer

A)  6.4 
B)  20.5 
C)  16.5 
D)  23.8 
E)  29.5 
A)  6.4 
B)  20.5 
C)  16.5 
D)  23.8 
E)  29.5

Question 17

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-Refer to Exhibit 14.5.What are the ROE's for Wal-Blue and its industry?

Accepted Answer

A)  24.3% and 27.0% 
B)  29.7% and 27.0% 
C)  29.7% and 30.0% 
D)  33.6% and 30.0% 
E)  34.5% and 31.5% 
A)  24.3% and 27.0% 
B)  29.7% and 27.0% 
C)  29.7% and 30.0% 
D)  33.6% and 30.0% 
E)  34.5% and 31.5%

Question 19

The best known measure of relative value for common stock is the P/E ratio.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the dollar cost of capital.

Accepted Answer

A)  286.2 
B)  207 
C)  234.36 
D)  238.44 
E)  302.9 
A)  286.2 
B)  207 
C)  234.36 
D)  238.44 
E)  302.9

Exam 14: Company Analysis and Stock Valuation

One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.

According to Peter Lynch a favorable attribute of a firm that may result in favorable stock performance is when a firm buys back its shares.

Turnarounds are firms with valuable assets that are hidden on the balance sheet.

When using the Present Value of Operating Free Cash Flow model,the firm's operating free cash flow to the firm is discounted by the firm's:

The Pekay Company has FCFE of $800.FCFE is expected to grow by 7% next year.The cost of capital is 7% and the level of debt is $4000.The number of shares outstanding is 700.Calculate the firm's share price.

A firm that follows a defensive competitive strategy could

Operating free cash flow and Free cash flow to equity are equivalent cash flow concepts.

The expected rate of return on Research Industries is twice the 12 percent expected rate of return from the market.What is Research's beta if the risk free rate is 6 percent?

Defensive companies are firms where

The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).

Exhibit 14.5 Use the Information Below for the Following Problem(S) Wal-Elue Industry DPS 1.00 1.50 Total As5et Tunover 3.20 2.50 Net Profit Marpin 3.50\% 3.00\% EpS 4.00 3.00 Total As5ets/Equity 3.00 4.00 -Refer to Exhibit 14.5.What are the ROE's for Wal-Blue and its industry?

The best known measure of relative value for common stock is the P/E ratio.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters