Exam 7: Valuing Stocks

Use the table for the question(s)below. -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 $84 million,excess cash of $66 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?

What are the major limitations of valuation using multiples?

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

With more firms introducing stock repurchase plans,how can we value such firms?

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:

Flinders Corporation's shares currently cost $32.00,and it has 80 million shares outstanding.If it pays out 70% of its earnings in total and its equity cost of capital is 10 percent,what are Flinders' earnings,given that these earnings are expected to grow by 5% per year in the future?

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.

Use the table for the question(s)below. -General Industries is expected to generate the above free cash flows over the next five years,after which free cash flows are expected to grow at a rate of 3% per year.If the weighted average cost of capital is 8% and General Industries has cash of $10 million,debt of $40 million,and 80 million shares outstanding,what is General Industries' expected terminal enterprise value?

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

A stock is expected to pay $0.80 per share every year indefinitely.If the current price of the stock is $18.90,and the equity cost of capital for the company that released the shares is 6.4%,what price would an investor be expected to pay per share five years into the future?

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 $12 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 60 million shares outstanding and an equity cost of capital of 8% with no debt,Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price?

What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?

Use the figure for the question(s)below. -The above screen shot above from Google Finance shows the price history of Progenics,a pharmaceutical company.In the time period shown,Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial.In which of the months shown in the price history is this most likely to have occurred?

Carbondale Oil announces that a wildcat well that it has sunk in a new oil province has shown the existence of substantial oil reserves.The exploitation of these reserves is expected to increase Carbondale's free cash flow by $100 million per year for eight years.If investors had not been expecting this news,what is the most likely effect on Carbondale's stock price upon the announcement,given that Carbondale has 80 million shares outstanding,no debt,and an equity cost of capital of 10%?

Suppose Air Canada has a current share price of $10.50 and an EPS of 1.12.Its competitor,WestJet,has an EPS of 3.13.Using the method of comparables,what is the expected price of WestJet stock?

Sunnyfax Publishing pays out all its earnings and has a share price of $38.In order to expand,Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds.Once the funds are reinvested,they are expected to grow at a rate of 12%.If the reinvestment does not affect Sunnyfax's equity cost of capital,what is the expected share price as a consequence of this decision?

Roswell Inc.is expected to pay an annual dividend of $0.66 per share in the coming year,and to trade for $9.25 at the end of the year.If investments with the same risk as Roswell's stock have an expected return of 11%,what is Roswell's capital gain rate?

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 $20 million per year for five years.If Aerelon has 65 million shares outstanding,an equity cost of capital of 12%,and no debt,by how much would Aerelon's shares be expected to fall in price as a result of this accident?

Use the table for the question(s)below. -Banco Industries expects 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 12%,$50 million in cash,$60 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?

Herring Fisheries plans to pay $0.65 per share in dividends in the coming year.If its equity cost of capital is 11%,and dividends are expected to grow by 2.5% per year in the future,what is the value of Herring's stock?