Exam 18: Option Valuation

Old Style Corporation produces goods that are very mature in their product life cycles.Old Style Corporation is expected to have per share FCFE in year 1 of $1.00,per share FCFE of $0.90 in year 2,and per share FCFE of $0.85 in year 3.After year 3,per share FCFE is expected to decline at a rate of 2% per year.An appropriate required rate of return for the stock is 8%.The stock should be worth ______.

An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 27,then it would be reasonable to assume the expected EPS of Dell in the coming year is ______.

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. -What is Paper Express's book value per share?

Investors want high plowback ratios

Suppose that the average P/E multiple in the oil industry is 22.Exxon is expected to have an EPS of $1.50 in the coming year.The intrinsic value of Exxon stock should be _____.

Suppose that the average P/E multiple in the oil industry is 20.Dominion Oil is expected to have an EPS of $3.00 in the coming year.The intrinsic value of Dominion Oil stock should be _____.

The goal of fundamental analysts is to find securities

The growth in per share FCFE of FOX,Inc.is expected to be 15%/year for the next three years,followed by a growth rate of 8%/year for two years; after this five year period,the growth in per share FCFE is expected to be 3%/year,indefinitely.The required rate of return on FOX,Inc.is 13%.Last year's per share FCFE was $1.85.What should the stock sell for today?

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding.Seaman's required return on equity is 11.6% and WACC is 10.4%.If FCFE is expected to grow at 5% forever,the intrinsic value of Seaman's shares are ____________.

Assume that Bolton Company will pay a $2.00 dividend per share next year,an increase from the current dividend of $1.50 per share that was just paid.After that,the dividend is expected to increase at a constant rate of 5%.If you require a 12% return on the stock,the value of the stock is ________.

Historically,P/E ratios have tended to be _________.

Xlink Company has an expected ROE of 15%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings.

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities).

The most appropriate discount rate to use when applying a FCFF valuation model is the ___________.

A version of earnings management that became common in the 1990s was

Each of two stocks,A and B,are expected to pay a dividend of $5 in the upcoming year.The expected growth rate of dividends is 10% for both stocks.You require a rate of return of 11% on stock A and a return of 20% on stock B.The intrinsic value of stock A _____.

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

A preferred stock will pay a dividend of $6.00 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

If a firm follows a low-investment-rate plan (applies a low plowback ratio),its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.