Question 1

Which of the following is not considered when looking at free cash flow to equity technique?

Accepted Answer

A)  Depreciation expense 
B)  Change in working capital 
C)  Principal debt repayments 
D)  Change in competitive environment 
E)  Net income 
A)  Depreciation expense 
B)  Change in working capital 
C)  Principal debt repayments 
D)  Change in competitive environment 
E)  Net income

Question 2

Which of the following statements concerning SWOT analysis is false?

Accepted Answer

A)  Strengths are the factors that give the firm a comparative advantage in the marketplace. 
B)  Weaknesses result when the company has potentially exploitable advantages over other firms. 
C)  Opportunities are environmental factors that favor the firm. 
D)  Threats are environmental factors that can hinder the firm in achieving its goals. 
E)  None of the above (that is, all statements are true) 
A)  Strengths are the factors that give the firm a comparative advantage in the marketplace. 
B)  Weaknesses result when the company has potentially exploitable advantages over other firms. 
C)  Opportunities are environmental factors that favor the firm. 
D)  Threats are environmental factors that can hinder the firm in achieving its goals. 
E)  None of the above (that is, all statements are true)

Question 3

Which of the following is not considered in the price-earnings ratio technique?

Accepted Answer

A)  Firm's required rate of return on equity (k) 
B)  Firm's dividend payout ratio (D/
E)  
C)  Firm's expected growth rate of dividends (g) 
D)  All of the above are components of P/E ratio 
E)  None of the above are components of P/E ratio 
A)  Firm's required rate of return on equity (k) 
B)  Firm's dividend payout ratio (D/
E)  
C)  Firm's expected growth rate of dividends (g) 
D)  All of the above are components of P/E ratio 
E)  None of the above are components of P/E ratio

Question 4

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 present value now (Year 2010)of FCFE during the period of declining growth (that is for years 2015 to 2018).

Accepted Answer

A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171 
A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171

Question 5

An overvalued stock is a non-growth stock.

Accepted Answer

A) True 
 B)False

Question 6

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 present value now (Year 2010)of OFCF during the period of constant growth (that is for years 2019 onwards).

Accepted Answer

A)  $19,644,612 
B)  $15,558,546 
C)  $17,377,494 
D)  $20,779,025 
E)  $10,779,025 
A)  $19,644,612 
B)  $15,558,546 
C)  $17,377,494 
D)  $20,779,025 
E)  $10,779,025

Question 7

A set of performance measures called ____ are directly related to the capital budgeting techniques used in corporate finance.

Accepted Answer

A)  Dividend discount model 
B)  Aggressive growth indexes 
C)  Growth indexes 
D)  Value added 
E)  Profit sensitization 
A)  Dividend discount model 
B)  Aggressive growth indexes 
C)  Growth indexes 
D)  Value added 
E)  Profit sensitization

Question 8

Based on the annual reports of Walgreens it has pursued both a low-cost strategy and a differentiation strategy for different business segments.

Accepted Answer

A) True 
 B)False

Question 9

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 expected sustainable growth rates for Wal-Blue and its industry?

Accepted Answer

A)  25.2% and 15.0% 
B)  30.0% and 17.5% 
C)  25.2% and 17.5% 
D)  27.5% and 12.5% 
E)  30.0% and 15.0% 
A)  25.2% and 15.0% 
B)  30.0% and 17.5% 
C)  25.2% and 17.5% 
D)  27.5% and 12.5% 
E)  30.0% and 15.0%

Question 10

Exhibit 14.1
Use the Information Below for the Following Problem(S)
(1) The firm's expected rate of growth of earning per share
(2) The amount of capital invested in growth investments
(3) The rate of return earned on the funds relative to the required rate of return
(4) The required rate of return on the security based on its systematic risk
(5) The firm's dividend payout ratio
(6) The time horizon when these growth investments will be available
-Refer to Exhibit 14.1.In the listing above,which three factors influence the capital gain component of a growth company?

Accepted Answer

A)  1, 3, and 5 
B)  2, 3, and 4 
C)  2, 3, and 6 
D)  3, 4, and 5 
E)  3, 4, and 6 
A)  1, 3, and 5 
B)  2, 3, and 4 
C)  2, 3, and 6 
D)  3, 4, and 5 
E)  3, 4, and 6

Question 11

Peter Lynch identified a number of attributes of firms that may result in favorable stock market performances,including

Accepted Answer

A)  Products that are faddish, people like change. 
B)  Firms that have competitive advantages over their rivals. 
C)  Firms that can benefit from cost reductions. 
D)  Choices b and c only 
E)  All of the above 
A)  Products that are faddish, people like change. 
B)  Firms that have competitive advantages over their rivals. 
C)  Firms that can benefit from cost reductions. 
D)  Choices b and c only 
E)  All of the above

Question 12

Johnson Company just paid an annual dividend of $1.75.The next dividend will be paid one year from today.Johnson Company expects a constant growth of 5% in dividends forever.The required rate of return for this company's common stock is 13%.What is the value of one share of common stock?

Accepted Answer

A)  $1.55 
B)  $13.46 
C)  $14.13 
D)  $21.88 
E)  $22.97 
A)  $1.55 
B)  $13.46 
C)  $14.13 
D)  $21.88 
E)  $22.97

Question 13

Which of the following ratios is least likely to be impacted by accounting manipulation?

Accepted Answer

A)  P/E 
B)  ROE 
C)  ROI 
D)  P/S 
E)  PM 
A)  P/E 
B)  ROE 
C)  ROI 
D)  P/S 
E)  PM

Question 14

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 weighted average cost of capital (WACC).

Accepted Answer

A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3% 
A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3%

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 cash operating expenses for the firm.

Accepted Answer

A)  225 
B)  228 
C)  232 
D)  242 
E)  252 
A)  225 
B)  228 
C)  232 
D)  242 
E)  252

Question 16

By definition growth companies have growth stocks.

Accepted Answer

A) True 
 B)False

Question 17

Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.

Accepted Answer

A) True 
 B)False

Question 18

ABC Co.has paid annual dividends in the past five years of $.20,$.25,$.28,$.33,and $.36.Calculate the average growth rate of its dividends.

Accepted Answer

A)  1.16% 
B)  1.80% 
C)  12.47% 
D)  15.83% 
E)  None of the above 
A)  1.16% 
B)  1.80% 
C)  12.47% 
D)  15.83% 
E)  None of the above

Question 19

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 14.10
Use the Information Below for the Following Problem(S)
 $\begin{array}{lr}
& \underline{\text{Left-Aid Corporation}}\ 
\text { DPS } & \$ 2.45 \
\text { Total Asset Turnover } & 3.80 \
\text { Net Profit Margin } & 6.50 \% \
\text { EPS } & \$ 3.50 \
\text { Total Assets/Equity } & 1.60
\end{array}$
-Refer to Exhibit 14.10.What is the Left-Aid Corporation's return on equity (ROE)?

Accepted Answer

A)  25.5% 
B)  27.4% 
C)  29.7% 
D)  35.6% 
E)  39.5% 
A)  25.5% 
B)  27.4% 
C)  29.7% 
D)  35.6% 
E)  39.5%

Exam 14: Company Analysis and Stock Valuation

Which of the following is not considered when looking at free cash flow to equity technique?

Which of the following statements concerning SWOT analysis is false?

Which of the following is not considered in the price-earnings ratio technique?

An overvalued stock is a non-growth stock.

A set of performance measures called ____ are directly related to the capital budgeting techniques used in corporate finance.

Based on the annual reports of Walgreens it has pursued both a low-cost strategy and a differentiation strategy for different business segments.

Peter Lynch identified a number of attributes of firms that may result in favorable stock market performances,including

Johnson Company just paid an annual dividend of $1.75.The next dividend will be paid one year from today.Johnson Company expects a constant growth of 5% in dividends forever.The required rate of return for this company's common stock is 13%.What is the value of one share of common stock?

Which of the following ratios is least likely to be impacted by accounting manipulation?

By definition growth companies have growth stocks.

Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.

ABC Co.has paid annual dividends in the past five years of $.20,$.25,$.28,$.33,and $.36.Calculate the average growth rate of its dividends.

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

Exhibit 14.10 Use the Information Below for the Following Problem(S) DPS \ 2.45 Total Asset Turnover 3.80 Net Profit Margin 6.50\% EPS \ 3.50 Total Assets/Equity 1.60 -Refer to Exhibit 14.10.What is the Left-Aid Corporation's return on equity (ROE)?

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

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