Exam 10: Stock Valuation: a Second Look

Use the table for the question(s)below. Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million)($ million)P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown)had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41, what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used?

Which of the following statements is FALSE?

Use the table for the question(s)below. FCF Forecast ($ million) Year 0 1 2 3 4 Sales 240 270 290 310 325.5 Growth versus Prior Year 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales)27.00 29.00 31.00 32.55 Less: Income Tax (37%)(9.99)10.73 11.47 12.44 Less Increase in NWC (12% of Change in Sales 3.6 2.4 2.4 1.86 Free Cash Flow 13.41 15.87 17.13 18.65 Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1?

Use the table for the question(s)below. Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million)($ million)P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown)had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firm's share price?

Use the table for the question(s)below. Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million)($ million)P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown)had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates?

In an efficient market, investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.

Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows II. the firm's cost of capital III. the firm's market price

Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?

If you value a stock using a range of stock valuation methods and these valuations indicate a stock price that is greater than its actual market price, it is most likely that the stock is under-valued.

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the ________.

Disposition effect is the tendency of individual investors to ________.

Which of the following statements is FALSE?

Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model?

Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price?

Use the table for the question(s)below. FCF Forecast ($ million) Year 0 1 2 3 4 Sales 240 270 290 310 325.5 Growth versus Prior Year 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales)27.00 29.00 31.00 32.55 Less: Income Tax (37%)(9.99)(10.73)(11.47)(12.44) Less Increase in NWC (12% of Change in Sales 3.6 2.4 2.4 1.86 Free Cash Flow 13.41 15.87 17.13 18.65 Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase?

Which of the following statements is FALSE?

Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of this accident?

Use the figure for the question(s)below: -An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms?

In the method of comparables, the known values of a firm's cash flows are used to estimate the unknown cash flows of a similar firm.

Which of the following statements is FALSE?