Question 1

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  True

Question 2

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}

\begin{array} { c c } 
\text {Year: }~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 & 2 \
\hline 
\text {Free cash flow:}- \mathbf { \$50 } & \mathbf { \$100 }
\end{array}
\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 A

Question 3

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?

Accepted Answer

A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47% 
A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47% E

Question 4

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 5

National Advertising 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 1.25,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?

Accepted Answer

A)  $14.52 
B)  $14.89 
C)  $15.26 
D)  $15.64 
E)  $16.03 
A)  $14.52 
B)  $14.89 
C)  $15.26 
D)  $15.64 
E)  $16.03

Question 6

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years,after the growth rate in earnings and dividends will fall to zero,i.e.,g = 0.The company's last dividend,D0,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock?

Accepted Answer

A)  $26.77 
B)  $27.89 
C)  $29.05 
D)  $30.21 
E)  $31.42 
A)  $26.77 
B)  $27.89 
C)  $29.05 
D)  $30.21 
E)  $31.42

Question 7

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? $$\begin{array} { l c c } 
\text {  } &  X  &  Y   \
\text { Price) } & \$30 & \$30 \
\text { Esgected growth (canstant) } & 6 \% & 4 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$$

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 8

The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years,after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (rs)is 12.0%.What is the best estimate of the current stock price?

Accepted Answer

A)  $37.05 
B)  $38.16 
C)  $39.30 
D)  $40.48 
E)  $41.70 
A)  $37.05 
B)  $38.16 
C)  $39.30 
D)  $40.48 
E)  $41.70

Question 9

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 10

Founders' shares are a type of classified stock where the shares are owned by the firm's founders,and they generally have more votes per share than the other classes of common stock.

Accepted Answer

A) True 
 B)False

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

The required return for Williamson Heating's stock is 12%,and the stock sells for $40 per share.The firm just paid a dividend of $1.00,and the dividend is expected to grow by 30% per year for the next 4 years,so D4 = $1.00(1.30)4 = $2.8561.After t = 4,the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4,i.e.,what is X?

Accepted Answer

A)  5.17% 
B)  5.44% 
C)  5.72% 
D)  6.02% 
E)  6.34% 
A)  5.17% 
B)  5.44% 
C)  5.72% 
D)  6.02% 
E)  6.34%

Question 13

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future.The company's beta is 1.15,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is Dyer's current stock price?

Accepted Answer

A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90 
A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B)  The stock valuation model, P0 = D1/(rs -g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
D)  The constant growth model cannot be used for a zero growth stock, where the dividend is 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 stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B)  The stock valuation model, P0 = D1/(rs -g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
D)  The constant growth model cannot be used for a zero growth stock, where the dividend is 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 15

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 16

Reynolds Construction's value of operations is $750 million based on the corporate valuation model.Its balance sheet shows $50 million of short-term investments that are unrelated to operations,$100 million of accounts payable,$100 million of notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital),and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?

Accepted Answer

A)  $429 
B)  $451 
C)  $475 
D)  $500 
E)  $525 
A)  $429 
B)  $451 
C)  $475 
D)  $500 
E)  $525

Question 17

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Accepted Answer

A)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C)  The stocks must sell for the same price. 
D)  Stock Y must have a higher dividend yield than Stock X. 
E)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. 
A)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C)  The stocks must sell for the same price. 
D)  Stock Y must have a higher dividend yield than Stock X. 
E)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.

Question 18

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

Accepted Answer

A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92 
A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92

Question 19

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g =-5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?

Accepted Answer

A)  The company's dividend yield 5 years from now is expected to be 10%. 
B)  The constant growth model cannot be used because the growth rate is negative. 
C)  The company's expected capital gains yield is 5%. 
D)  The company's expected stock price at the beginning of next year is $9.50. 
E)  The company's current stock price is $20. 
A)  The company's dividend yield 5 years from now is expected to be 10%. 
B)  The constant growth model cannot be used because the growth rate is negative. 
C)  The company's expected capital gains yield is 5%. 
D)  The company's expected stock price at the beginning of next year is $9.50. 
E)  The company's current stock price is $20.

Question 20

Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring.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

Exam 7: Valuation of Stocks and Corporations

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

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?

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?

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? X Y Price) \3 0 \3 0 Esgected growth (canstant) 6\% 4\% Required return 12\% 10\%

The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years,after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (rs)is 12.0%.What is the best estimate of 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.

Founders' shares are a type of classified stock where the shares are owned by the firm's founders,and they generally have more votes per share than the other classes of common stock.

Which of the following statements is CORRECT?

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?

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g =-5%).If the company is in equilibrium and its expected and required rate of return is 15%,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

Agency Conflicts and 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

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

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

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?

The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years,after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (r_s)is 12.0%.What is the best estimate of the current stock price?

The required returns of Stocks X and Y are r_X = 10% and r_Y = 12%.Which of the following statements is CORRECT?

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% 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?

A stock is expected to pay a year-end dividend of $2.00,i.e.,D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g =-5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?