Question 1

Which of the following formulas is INCORRECT?

Accepted Answer

A) Forward  
=
   
B) Forward  
=
   
C)   
=
   
D) Forward  
=
   
A) Forward  
=
   
B) Forward  
=
   
C)   
=
   
D) Forward  
=

Question 2

Which of the following equations is INCORRECT?

Accepted Answer

A) P0 =   
B) V0 =  
+
  
+ ...+
  
+
   
C) Free Cash Flow = EBIT × (1 - τc)+ Depreciation - Capital Expenditures - DNWC 
D) Enterprise Value = Market Value of Equity + Debt - Cash 
A) P0 =   
B) V0 =  
+
  
+ ...+
  
+
   
C) Free Cash Flow = EBIT × (1 - τc)+ Depreciation - Capital Expenditures - DNWC 
D) Enterprise Value = Market Value of Equity + Debt - Cash

Question 3

Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years:   Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-The enterprise value of CCM corporation is closest to:

Accepted Answer

A) $396 million 
B) $290 million 
C) $382 million 
D) $350 million 
A) $396 million 
B) $290 million 
C) $382 million 
D) $350 million

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average P/E ratio of comparable firms. 
B) For valuation purposes,the trailing P/E ratio is generally preferred,since it is based on actual not expected earnings. 
C) Forward earnings are the expected earnings over the coming 12 months. 
D) Trailing earnings are the earnings over the previous 12 months. 
A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average P/E ratio of comparable firms. 
B) For valuation purposes,the trailing P/E ratio is generally preferred,since it is based on actual not expected earnings. 
C) Forward earnings are the expected earnings over the coming 12 months. 
D) Trailing earnings are the earnings over the previous 12 months.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) A common approximation is to assume that in the long run,dividends will grow at a constant rate. 
B) The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate. 
C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. 
D) During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends. 
A) A common approximation is to assume that in the long run,dividends will grow at a constant rate. 
B) The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate. 
C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. 
D) During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Question 6

Which of the following formulas is INCORRECT?

Accepted Answer

A) P0 =  
+
  
+ ...+
   
B) P0 =  
  
C) rE =   
D) P0 =   
A) P0 =  
+
  
+ ...+
   
B) P0 =  
  
C) rE =   
D) P0 =

Question 7

You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

Accepted Answer

A) 6.0% 
B) 7.5% 
C) 4.5% 
D) 3.0% 
A) 6.0% 
B) 7.5% 
C) 4.5% 
D) 3.0%

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues. 
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments,we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones. 
C) If the firm has no debt then rwacc = the risk-free rate of return. 
D) When using the discounted free cash flow model,we forecast the firm's free cash flow up to some horizon,together with some terminal (continuation)value of the enterprise. 
A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues. 
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments,we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones. 
C) If the firm has no debt then rwacc = the risk-free rate of return. 
D) When using the discounted free cash flow model,we forecast the firm's free cash flow up to some horizon,together with some terminal (continuation)value of the enterprise.

Question 9

Which of the following formulas is INCORRECT?

Accepted Answer

A) g = retention rate × return on new investment 
B) Divt = EPSt × Dividend Payout Rate 
C) P0 =   
D) rE =  
- g 
A) g = retention rate × return on new investment 
B) Divt = EPSt × Dividend Payout Rate 
C) P0 =   
D) rE =  
- g

Question 10

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 enterprise value to EBITDA ratio,the value of a share of Texas Trucking is closest to:

Accepted Answer

A) $33.00 
B) $82.50 
C) $43.10 
D) $21.25 
A) $33.00 
B) $82.50 
C) $43.10 
D) $21.25

Question 11

Which of the following statements is false regarding profitable and unprofitable growth?

Accepted Answer

A) If a firm wants to increase its share price,it must cut its dividend and invest more. 
B) If the firm retains more earnings,it will be able to pay out less of those earnings,which means that the firm will have to reduce its dividend. 
C) A firm can increase its growth rate by retaining more of its earnings. 
D) Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have a positive NPV. 
A) If a firm wants to increase its share price,it must cut its dividend and invest more. 
B) If the firm retains more earnings,it will be able to pay out less of those earnings,which means that the firm will have to reduce its dividend. 
C) A firm can increase its growth rate by retaining more of its earnings. 
D) Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have a positive NPV.

Question 12

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's equity cost of capital is closest to:

Accepted Answer

A) 4.0% 
B) 6.4% 
C) 8.2% 
D) 14.0% 
A) 4.0% 
B) 6.4% 
C) 8.2% 
D) 14.0%

Question 13

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:

Accepted Answer

A) $25.00 
B) $40.00 
C) $15.40 
D) $11.10 
A) $25.00 
B) $40.00 
C) $15.40 
D) $11.10

Question 14

Kinston Industries just announced that it will cut its dividend from $3.00 to $2.00 per share and use the extra funds to expand its operations.Kinston's dividends were expected to grow at a 2% rate,and its share price was $37.50.With the new expansion,Kinston dividends are expected to grow at a 5% rate.Kinston's share price following this announcement should be:

Accepted Answer

A) $20.00 
B) $30.00 
C) $37.50 
D) $40.00 
A) $20.00 
B) $30.00 
C) $37.50 
D) $40.00

Question 15

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 to hold Von Bora stock for only one year.Your capital gain rate from holding Von Bora stock for the first year is closest to:

Accepted Answer

A) 3.5% 
B) 4.0% 
C) 6.0% 
D) 4.5% 
A) 3.5% 
B) 4.0% 
C) 6.0% 
D) 4.5%

Question 16

Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years:   Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-If CCM has $150 million of debt and 12 million shares of stock outstanding,then the share price for CCM is closest to:

Accepted Answer

A) $49.50 
B) $11.25 
C) $20.50 
D) $22.75 
A) $49.50 
B) $11.25 
C) $20.50 
D) $22.75

Question 17

Use the information for the question(s)below.
In a surprise announcement,NASA released details of a major contract with Lockheed-Martin (LMT)that would increase LMT's market value by $7.5 billion.It was widely expected by the market that this contract would be awarded to LMT's major competitor Boeing (BA).Assume that Boeing has 800 million shares outstanding and Lockheed Martin has 425 million shares outstanding.Prior to this announcement,the market felt that the probability of Boeing winning the contract was 90% and that Lockheed-Martin's chance was only about 10%.
-What do you anticipate will happen to Lockheed-Martin and Boeing's stock prices are a result of this surprise announcement?

Accepted Answer

Lockheed-Martin
Price increase = $7500 m

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) The more cash the firm uses to repurchase shares,the less it has available to pay dividends. 
B) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. 
C) We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow. 
D) We can interpret the enterprise value as the net cost of acquiring the firm's equity,taking its cash and paying off all debts. 
A) The more cash the firm uses to repurchase shares,the less it has available to pay dividends. 
B) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. 
C) We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow. 
D) We can interpret the enterprise value as the net cost of acquiring the firm's equity,taking its cash and paying off all debts.

Question 19

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

A) $10.00 
B) $15.00 
C) $14.00 
D) $12.50 
A) $10.00 
B) $15.00 
C) $14.00 
D) $12.50

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) To estimate a firm's enterprise value,we compute the present value of the free cash flows (FCF)that the firm has available to pay equity holders. 
B) The NPV of any individual project represents its contribution to the firm's enterprise value. 
C) When using the total payout model,we discount total dividends and share repurchases,and use the growth rate in earnings when forecasting the growth of the firm's payout. 
D) In the total payout model,we first value the firm's equity,rather than just a single share. 
A) To estimate a firm's enterprise value,we compute the present value of the free cash flows (FCF)that the firm has available to pay equity holders. 
B) The NPV of any individual project represents its contribution to the firm's enterprise value. 
C) When using the total payout model,we discount total dividends and share repurchases,and use the growth rate in earnings when forecasting the growth of the firm's payout. 
D) In the total payout model,we first value the firm's equity,rather than just a single share.

Exam 9: Valuing Stocks

Which of the following formulas is INCORRECT?

Which of the following equations is INCORRECT?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

Which of the following statements is false regarding profitable and unprofitable growth?

Use the following information to answer the question(s)below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's equity cost of capital is closest to:

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:

Which of the following statements is FALSE?

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

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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