Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The firm's weighted average cost of capital (WAC
C) denoted rwacc is the cost of capital that reflects the risk of the overall business,which is the combined risk of the firm's equity and debt. 
B) Intuitively,the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. 
C) We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. 
D) When using the discounted free cash flow model we should use the firm's equity cost of capital. 
A) The firm's weighted average cost of capital (WAC
C) denoted rwacc is the cost of capital that reflects the risk of the overall business,which is the combined risk of the firm's equity and debt. 
B) Intuitively,the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. 
C) We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. 
D) When using the discounted free cash flow model we should use the firm's equity cost of capital.

Question 2

Use the following information to answer the question(s)below.
Taggart Transcontinental pays no dividends,but spent $4 billion on share repurchases last year.Taggart's equity cost of capital is 13% and the amount spent on repurchases is expected to grow by 5% per year.Taggart currently has 2 billion shares outstanding.
-Taggart's market capitalization is closest to:

Accepted Answer

A) $25 billion 
B) $31 billion 
C) $40 billion 
D) $50 billion 
A) $25 billion 
B) $31 billion 
C) $40 billion 
D) $50 billion

Question 3

What are some common multiples used to value stocks?

Accepted Answer

Price to Earnings
Enterprise v

Question 4

What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

Accepted Answer

Comparable firms have similar

Question 5

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Accepted Answer

A) Discounted free cash flow model 
B) Dividend discount model 
C) Enterprise value model 
D) Total payout model 
A) Discounted free cash flow model 
B) Dividend discount model 
C) Enterprise value model 
D) Total payout model

Question 6

Use the information for the question(s)below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%.
-Suppose you plan on purchasing Von Bora stock in one year,right after the $1.40 dividend is paid.You then plan on selling your stock at the end of year two,right after the $1.50 dividend is paid.The capital gain rate that you will receive on your investment is closest to:

Accepted Answer

A) 4.00% 
B) 3.75% 
C) 6.25% 
D) 3.50% 
A) 4.00% 
B) 3.75% 
C) 6.25% 
D) 3.50%

Question 7

Which of the following formulas is INCORRECT?

Accepted Answer

A) Capital Gains Rate =   
B) Dividend Yield =   
C) P0 =  
+
   
D) rE = Capital Gains Rate + Dividend Yield 
A) Capital Gains Rate =   
B) Dividend Yield =   
C) P0 =  
+
   
D) rE = Capital Gains Rate + Dividend Yield

Question 8

MJ LTD is expected to grow at various rates over the next five years.The company just paid a $1.00 dividend.The company expects to grow at 20% for the next two years (effecting D1 and D2),then the company expects to grow at 10% for three additional years (D3,D4,D5)after which the company expects to grow at a constant rate of 5% per year indefinitely.If the required rate of return on MJ's common stock is 12%,then what is a share of MJ's stock worth?

Accepted Answer

@#IMG-DLM& Current Value of Sh

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) We must discount the cash flows from stock based on the equity cost of capital for the stock. 
B) The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock. 
C) The firm might pay out cash to its shareholders in the form of a dividend. 
D) The dividend yield is the expected annual dividend of a stock,divided by its expected future sale price. 
A) We must discount the cash flows from stock based on the equity cost of capital for the stock. 
B) The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock. 
C) The firm might pay out cash to its shareholders in the form of a dividend. 
D) The dividend yield is the expected annual dividend of a stock,divided by its expected future sale price.

Question 10

Use the following information to answer the question(s)below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share)and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to have earnings of $500 million this year.Rufus plans to pay out 40% of its earnings in dividends and they expect to use another 20% of their earnings to repurchase shares.If Rufus' equity cost of capital is 15% and Rufus' earnings are expected to grow at a rate of 3% per year,then the value of a share of Rufus stock is closest to:

Accepted Answer

A) $13.35 
B) $33.50 
C) $20.00 
D) $16.00 
A) $13.35 
B) $33.50 
C) $20.00 
D) $16.00

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) The fact that a firm has an exceptional management team,has developed an efficient manufacturing process,or has just secured a patient on a new technology is ignored when we apply a valuation multiple. 
B) Valuation multiples have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth. 
C) For firms with substantial tangible assets,the ratio of price to book value of equity per share is sometimes used. 
D) Using multiples will not help us determine if an entire industry is overvalued. 
A) The fact that a firm has an exceptional management team,has developed an efficient manufacturing process,or has just secured a patient on a new technology is ignored when we apply a valuation multiple. 
B) Valuation multiples have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth. 
C) For firms with substantial tangible assets,the ratio of price to book value of equity per share is sometimes used. 
D) Using multiples will not help us determine if an entire industry is overvalued.

Question 12

When discounting dividends you should use:

Accepted Answer

A) the weighted average cost of capital. 
B) the after tax weighted average cost of capital. 
C) the equity cost of capital. 
D) the before tax cost of debt. 
A) the weighted average cost of capital. 
B) the after tax weighted average cost of capital. 
C) the equity cost of capital. 
D) the before tax cost of debt.

Question 13

Use the information for the question(s)below.
You expect DM Corporation to generate the following free cash flows over the next five years:   Beginning with year six,you estimate that DM's free cash flows will grow at 6% per year and that DM's weighted average cost of capital is 15%.
-If DM has $500 million of debt and 14 million shares of stock outstanding,then what is the price per share for DM Corporation?

Accepted Answer

V₀ = @#IMG-DLM& + @#IMG-DLM& + ...+ @#IMG-DLM& + @#IMG-DLM& V₀ = @#IMG-DLM& +

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) An investor will be willing to pay up to the point at which the current price of a share of stock equals the present value of the expected future dividends and the expected future sale price. 
B) The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk. 
C) The total amount received in dividends and from selling the stock will depend on the investor's investment horizon. 
D) If the current stock price were greater than P0 =  
,it would be a positive NPV investment,and we would expect investors to rush in and buy it,driving up the stocks price. 
A) An investor will be willing to pay up to the point at which the current price of a share of stock equals the present value of the expected future dividends and the expected future sale price. 
B) The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk. 
C) The total amount received in dividends and from selling the stock will depend on the investor's investment horizon. 
D) If the current stock price were greater than P0 =  
,it would be a positive NPV investment,and we would expect investors to rush in and buy it,driving up the stocks price.

Question 15

Use the information for the question(s)below.
Suppose that Texas Trucking (TT)has earnings per share of $3.45 and EBITDA of $45 million.TT also has 5 million shares outstanding and debt of $150 million (net of cash).You believe that Oklahoma Logistics and Transport (OLT)is comparable to TT in terms of its underlying business,but OLT has no debt.OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7.
-Based upon the price earnings multiple,the value of a share of Texas Trucking is closest to:

Accepted Answer

A) $49.30 
B) $43.10 
C) $24.15 
D) $27.60 
A) $49.30 
B) $43.10 
C) $24.15 
D) $27.60

Question 16

Use the following information to answer the question(s)below.  
-Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the P/E ratios for its competitors,the highest expected stock price for Novartis is closest to:

Accepted Answer

A) $31.86 
B) $44.35 
C) $51.09 
D) $62.60 
A) $31.86 
B) $44.35 
C) $51.09 
D) $62.60

Question 17

Use the information for the question(s)below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%.
-Suppose you plan on purchasing Von Bora stock in one year,right after the $1.40 dividend is paid.You then plan on selling your stock at the end of year two,right after the $1.50 dividend is paid.The total return that you will receive on your investment is closest to:

Accepted Answer

A) 9.50% 
B) 10.75% 
C) 10.25% 
D) 10.00% 
A) 9.50% 
B) 10.75% 
C) 10.25% 
D) 10.00%

Question 18

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the:

Accepted Answer

A) enterprise value model. 
B) dividend discount model. 
C) total payout model. 
D) discounted free cash flow model. 
A) enterprise value model. 
B) dividend discount model. 
C) total payout model. 
D) discounted free cash flow model.

Question 19

Wyatt Oil just reported that a major fire destroyed one of its oil production facilities in Colorado.While the facility was fully insured,the loss of oil production will decrease Wyatt's free cash flow by $120 million at the end of this year and by $80 million at the end of next year.Wyatt has 50 million shares outstanding and has a weighted average cost of capital of 9%.Assuming the value of Wyatt's debt is not affected by this event,the expected decrease in Wyatt's stock price is closest to:

Accepted Answer

A) $2.00 
B) $3.55 
C) $3.87 
D) $4.00 
A) $2.00 
B) $3.55 
C) $3.87 
D) $4.00

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Stock markets aggregate the information and view of many different investors. 
B) Only in the relatively rare case in which we have some superior information that other investors lack regarding the firm's cash flows and cost of capital would it make sense to second-guess the market stock price. 
C) In most situations,a valuation model is best applied to tell us something about the value of the firm's stock. 
D) The efficient market hypothesis implies that securities will be fairly priced,based on their future cash flows,given all information that is available to investors. 
A) Stock markets aggregate the information and view of many different investors. 
B) Only in the relatively rare case in which we have some superior information that other investors lack regarding the firm's cash flows and cost of capital would it make sense to second-guess the market stock price. 
C) In most situations,a valuation model is best applied to tell us something about the value of the firm's stock. 
D) The efficient market hypothesis implies that securities will be fairly priced,based on their future cash flows,given all information that is available to investors.

Exam 9: Valuing Stocks

Which of the following statements is FALSE?

What are some common multiples used to value stocks?

What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

When discounting dividends you should use:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the P/E ratios for its competitors,the highest expected stock price for Novartis is closest to:

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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