Exam 8: Basic Stock Valuation

Kinkead Inc.forecasts that its free cash flow in the coming year,i.e.,at t = 1,will be −$10 million,but its FCF at t = 2 will be $20 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14%,what is the firm's value of operations,in millions?

From an investor's perspective,a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However,from a corporate issuer's standpoint,these risk relationships are reversed: Bonds are the most risky for the firm,preferred is next,and common is least risky.

Connolly Co.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is $\tilde{\mathrm{P}}_{7}$ ?

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%,and the constant growth rate is g = 4.0%.What is the current value of operations?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

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

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Based on the free cash flow valuation model,the value of Weidner Co.'s operations is $1,200 million.The company's balance sheet shows $80 million in accounts receivable,$60 million in inventory,and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable,$120 million in notes payable,$300 million in long-term debt,$50 million in preferred stock,$180 million in retained earnings,and $800 million in total common equity.If Weidner has 30 million shares of stock outstanding,what is the best estimate of the stock's price per share?

Sawchuck Consulting has been profitable for the last 5 years,but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? A B Price \ 25 \ 40 Expected growth 7\% 9\% Expected return 10\% 12\%

The preemptive right is important to shareholders because it

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

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?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? A B Required return 10\% 12\% Market price \ 25 \ 40 Expected growth 7\% 9\%

Stocks A and B have the following data.The market risk premium is 6.0% and the risk-free rate is 6.4%.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? Beta 1.10 0.90 Constant growth rate 7.00\% 7.00\%

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s)is 11%,what is its current stock price?

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).