Question 1

List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.

Accepted Answer

1.Value the company's operations by discounting free cash flow using the weighted average cost of capital as the discount rate.
2.Identify and value nonoperating assets and add their value to the value of operations to give the total enterprise value.
3.Identify and value all debt and other nonequity claims against the enterprise.
4.Subtract the value of nonequity financial claims from enterprise value to determine the value of common equity.To estimate price per share,divide equity value by the number of current shares outstanding.]

Question 2

Preferred stock in well-established companies more closely resembles unsecured debt than equity.

Accepted Answer

A) True 
 B)False  True

Question 3

Since employee options represent just the possibility of acquiring stock instead of an obligation,the value of these options should not be factored into estimating the equity value.

Accepted Answer

A) True 
 B)False  False

Question 4

In the APV approach,why is the unlevered cost of equity used instead of the WACC?

Accepted Answer

A) To account for retained earnings risk. 
B) To avoid measuring the impact of debt. 
C) To value the company as if it were all equity financed. 
D) To incorporate the risk of newly issued shares. 
A) To account for retained earnings risk. 
B) To avoid measuring the impact of debt. 
C) To value the company as if it were all equity financed. 
D) To incorporate the risk of newly issued shares.

Question 5

Use the following information below to answer the question. NOPLATt₊₁ = $72.2m
NOPLAT growth rate = 3%
Return on new invested capital = 11.2%
Weighted average cost of capital = 7.4%
Which of the following is closest to the continuing value in year t?

Accepted Answer

A) $1,005m 
B) $1,201m 
C) $4,485m 
D) $6,126m 
A) $1,005m 
B) $1,201m 
C) $4,485m 
D) $6,126m

Question 6

Bigger Brewing Co.is a U.S.-based company that is undergoing a leveraged buyout with a projected capital structure of 80 percent debt in the near term.There is a projected loan repayment schedule,with the goal of having a capital structure of 50 percent debt in three years.Based on this information,the best methodology to value this firm would be the enterprise discounted cash flow methodology.

Accepted Answer

A) True 
 B)False

Question 7

Enterprise DCF and economic-profit models differ with respect to the discount rate used to estimate the future income streams.

Accepted Answer

A) True 
 B)False

Question 8

A firm is financed with 62 percent debt and 38 percent equity.The pretax costs of debt and equity capital are 6.6 percent and 11.3 percent,respectively.What is the tax rate if the WACC is 7 percent?

Accepted Answer

A) 31 percent. 
B) 34 percent. 
C) 37 percent. 
D) 64 percent. 
A) 31 percent. 
B) 34 percent. 
C) 37 percent. 
D) 64 percent.

Question 9

Given the following information,compute the estimated value per share. $$\begin{array} { | l | r | } 
\hline \text { Present value of cash flow: } & \$ 33 \mathrm {~m} \
\hline \text { Midyear adjustment factor: } & \$ 1.2 \mathrm {~m} \
\hline \text { Value of tax Ioss c amy-forwards: } & \$ 2.9 \mathrm {~m} \
\hline \text { Value of debt: } & \$ 14.4 \mathrm {~m} \
\hline \begin{array} { l } 
\text { Value of capitalized operating } \
\text { leases: }
\end{array} & \$ 5.2 \mathrm {~m} \
\hline \text { Number of shares outstanding: } & 2.5 \mathrm {~m} \
\hline
\end{array}$$

Accepted Answer

A) $5.80 
B) $6.04 
C) $7.00 
D) .$7.92 
A) $5.80 
B) $6.04 
C) $7.00 
D) .$7.92

Question 10

Which of the following valuation methods use(s )the weighted average cost of capital (WACC )as the discount factor?
I.The economic profit model.
II.The adjusted present value model.
III.The discounted cash flow model.
IV.None of the above.

Accepted Answer

A) I and II only. 
B) I and III only. 
C) II and III only. 
D) IV. 
A) I and II only. 
B) I and III only. 
C) II and III only. 
D) IV.

Question 11

Operating leases represent the most common form of off-balance-sheet debt.

Accepted Answer

A) True 
 B)False

Question 12

Given the following data,what is the enterprise value of the company? $$\begin{array} { | l | r | } 
\hline \text { Free cash flow (FCF) for year } 1 & \$ 50 \mathrm {~m} \
\hline \text { FCF for year } 2 & \$ 50 \mathrm {~m} \
\hline \text { Continuing value of FCF at t = 2 } & \$ 291.6 \mathrm {~m} \
\hline \text { Interest tax shield (ITS) for year } 1 & \$ 5 \mathrm {~m} \
\hline \text { ITs for year } 2 & \$ 5 \mathrm {~m} \
\hline \text { Continuing value of ITS at t = } 2 & \$ 17.5 \mathrm {~m} \
\hline \text { Unlevered cost of equity } & 8 \% \
\hline \text { Wacc } & 7 \% \
\hline \text { Midyear adjustment factor } & \$ 4 \mathrm {~m} \
\hline \text { Excess cash and investments } & \$ 18 \mathrm {~m} \
\hline
\end{array}$$

Accepted Answer

A) $301m 
B) $285m 
C) $349m 
D) $100m 
A) $301m 
B) $285m 
C) $349m 
D) $100m

Question 13

Given the following information,compute the estimated value per share. $$\begin{array} { | l | r | } 
\hline \text { Present value of cash flow } & \$ 25 \mathrm {~m} \
\hline \text { Midyear adjustment factor } & \$ 0.6 \mathrm {~m} \
\hline \text { Value of tax loss carryforwards } & \$ 1 \mathrm {~m} \
\hline \text { Value of debt } & \$ 8.6 \mathrm {~m} \
\hline \text { Value of capitaliced operating leases } & \$ 2.2 \mathrm {~m} \
\hline \text { Number of shares outstanding } & 8 \mathrm {~m} \
\hline
\end{array}$$

Accepted Answer

A) $5.00 
B) $4.68 
C) $7.55 
D) $11.2 
A) $5.00 
B) $4.68 
C) $7.55 
D) $11.2

Question 14

When valuing a parent company that owns less than 100 percent of a subsidiary,the minority interest holder of the subsidiary has a claim on the company's assets.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is best to use when valuing a financial institution?

Accepted Answer

A) Enterprise discounted cash flow model. 
B) Adjusted present value (APV). 
C) Equity cash flow model. 
D) Capital cash flow model. 
A) Enterprise discounted cash flow model. 
B) Adjusted present value (APV). 
C) Equity cash flow model. 
D) Capital cash flow model.

Question 16

Use the following information to find the NOPLAT in year t+1 that yields the continuing value expressed below. NOPLATt₊₁ = ?
NOPLAT growth rate = 1.5%
Return on new invested capital = 9%
Weighted average cost of capital = 6.8%
Continuing value = $1,750

Accepted Answer

A) $111m 
B) $95m 
C) $105m 
D) $184m 
A) $111m 
B) $95m 
C) $105m 
D) $184m

Question 17

The framework for valuation that compresses free cash flow and the interest tax shield into one number,making it difficult to compare operating performance among companies and over time,is the:

Accepted Answer

A) Discounted economic profit model. 
B) Capital cash flow model. 
C) Equity cash flow model.
E )Enterprise discounted cash flow (DCF )model. 
A) Discounted economic profit model. 
B) Capital cash flow model. 
C) Equity cash flow model.
E )Enterprise discounted cash flow (DCF )model.

Exam 8: Frameworks for Valuation

List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.

Preferred stock in well-established companies more closely resembles unsecured debt than equity.

Since employee options represent just the possibility of acquiring stock instead of an obligation,the value of these options should not be factored into estimating the equity value.

In the APV approach,why is the unlevered cost of equity used instead of the WACC?

Use the following information below to answer the question. NOPLATt₊₁ = $72.2m NOPLAT growth rate = 3% Return on new invested capital = 11.2% Weighted average cost of capital = 7.4% Which of the following is closest to the continuing value in year t?

Enterprise DCF and economic-profit models differ with respect to the discount rate used to estimate the future income streams.

A firm is financed with 62 percent debt and 38 percent equity.The pretax costs of debt and equity capital are 6.6 percent and 11.3 percent,respectively.What is the tax rate if the WACC is 7 percent?

Given the following information,compute the estimated value per share. Present value of cash flow: \ 33 Midyear adjustment factor: \ 1.2 Value of tax Ioss c amy-forwards: \ 2.9 Value of debt: \ 14.4 Value of capitalized operating leases: \ 5.2 Number of shares outstanding: 2.5

Which of the following valuation methods use(s )the weighted average cost of capital (WACC )as the discount factor? I.The economic profit model. II.The adjusted present value model. III.The discounted cash flow model. IV.None of the above.

Operating leases represent the most common form of off-balance-sheet debt.

Given the following information,compute the estimated value per share. Present value of cash flow \ 25 Midyear adjustment factor \ 0.6 Value of tax loss carryforwards \ 1 Value of debt \ 8.6 Value of capitaliced operating leases \ 2.2 Number of shares outstanding 8

When valuing a parent company that owns less than 100 percent of a subsidiary,the minority interest holder of the subsidiary has a claim on the company's assets.

Which of the following is best to use when valuing a financial institution?

Use the following information to find the NOPLAT in year t+1 that yields the continuing value expressed below. NOPLATt₊₁ = ? NOPLAT growth rate = 1.5% Return on new invested capital = 9% Weighted average cost of capital = 6.8% Continuing value = $1,750

The framework for valuation that compresses free cash flow and the interest tax shield into one number,making it difficult to compare operating performance among companies and over time,is the:

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters