Question 1

Which of the following is not considered a relative valuation technique?

Accepted Answer

A)  Price-earnings ratio 
B)  Price/cash flow ratio 
C)  Price/book value ratio 
D)  Price/cost of goods sold ratio 
E)  Price/sales ratio 
A)  Price-earnings ratio 
B)  Price/cash flow ratio 
C)  Price/book value ratio 
D)  Price/cost of goods sold ratio 
E)  Price/sales ratio

Question 2

Based on the information provided, calculate the intrinsic value in 2009 of a share of INV Corp. using the Present Value of Earnings Model (infinite holding period). For 2009 Net Income was $250,000, total debt was $50,000, and there were 206,263 shares outstanding. The required rate of return is 12% and the estimated growth rate in earnings is 5.5%.

Accepted Answer

A)  $19.43 
B)  $23.98 
C)  $28.52 
D)  $22.73 
E)  $15.50 
A)  $19.43 
B)  $23.98 
C)  $28.52 
D)  $22.73 
E)  $15.50

Question 3

Exhibit 9-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Harcourt Industries currently has an 18% annual growth rate while the market average is 8%. The market multiple is 12.
-Refer to Exhibit 9-3. Determine the P/E ratio for Harcourt Industries assuming Harcourt can maintain its superior growth rate for the next 3 years.

Accepted Answer

A)  4.25 
B)  12.50 
C)  15.67 
D)  30.10 
E)  42.80 
A)  4.25 
B)  12.50 
C)  15.67 
D)  30.10 
E)  42.80

Question 4

Exhibit 9-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Modular Industries currently has a 16% annual growth rate while the market average is 6%. The market multiple is 10.
-Refer to Exhibit 9-2. Determine the justified P/E ratio for Modular Industries assuming Modular can maintain its superior growth rate for the next 5 years.

Accepted Answer

A)  6.4 
B)  13.1 
C)  16.5 
D)  23.8 
E)  15.7 
A)  6.4 
B)  13.1 
C)  16.5 
D)  23.8 
E)  15.7

Question 5

When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

Accepted Answer

A)  Defensive strategy 
B)  Differentiation strategy 
C)  Low-cost strategy 
D)  Focused strategy 
E)  Value strategy 
A)  Defensive strategy 
B)  Differentiation strategy 
C)  Low-cost strategy 
D)  Focused strategy 
E)  Value strategy

Question 6

Which of the following statements concerning global company analysis is false?

Accepted Answer

A)  Analysis of companies within industries should be extended to include foreign companies. 
B)  There is a problem in obtaining data that is required for a thorough company analysis of foreign companies. 
C)  Foreign companies' financial risk should be evaluated over time. 
D)  Differences in relative measures can be explained by the variations in accounting procedures among countries and investors attitudes within each country. 
E)  All of the above statements are true. 
A)  Analysis of companies within industries should be extended to include foreign companies. 
B)  There is a problem in obtaining data that is required for a thorough company analysis of foreign companies. 
C)  Foreign companies' financial risk should be evaluated over time. 
D)  Differences in relative measures can be explained by the variations in accounting procedures among countries and investors attitudes within each country. 
E)  All of the above statements are true.

Question 7

Based on the information provided, calculate the intrinsic value in 2004 of a share of INV Corp. using the FCFF (free cash flow to the firm) model. For 2009 the FCFF was $30,000, total debt was $20,000, and there were 12000 shares outstanding. The required rate of return is 9% and the estimated growth rate in FCFF is 6.5%.

Accepted Answer

A)  $104.83 
B)  $153.25 
C)  $112.50 
D)  $94.92 
E)  $80.45 
A)  $104.83 
B)  $153.25 
C)  $112.50 
D)  $94.92 
E)  $80.45

Question 8

A firm that follows a differentiation strategy

Accepted Answer

A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above. 
A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above.

Question 9

Exhibit 9-8
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 25 \% \
2011 & 20 \% \
2012 & 15 \% \
2013 & 10 \% \
2014 & 12 \% \
2015 & 14 \% \
2016 & 16 \% \
2017 & 198
\end{array}$$ 
From year 2018 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 9-8. Calculate the total intrinsic value of the firm.

Accepted Answer

A)  $19,644,612 
B)  $15,558,546 
C)  $17,327,250 
D)  $20,830,412 
E)  $10,779,025 
A)  $19,644,612 
B)  $15,558,546 
C)  $17,327,250 
D)  $20,830,412 
E)  $10,779,025

Question 10

In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).

Accepted Answer

A) True 
 B)False

Question 11

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

Accepted Answer

A) True 
 B)False

Question 12

To benefit from cost leadership a firm must command prices near the industry average.

Accepted Answer

A) True 
 B)False

Question 13

While EVA is considered an internal performance measure, MVA is considered to be an external performance measure.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following are tenets of Warren Buffett?

Accepted Answer

A)  Business tenets. 
B)  Financial tenets. 
C)  Management tenets. 
D)  All of the above. 
E)  None of the above. 
A)  Business tenets. 
B)  Financial tenets. 
C)  Management tenets. 
D)  All of the above. 
E)  None of the above.

Question 15

A defensive company is one whose sales, earnings and cash flows are strongly correlated with the business cycle.

Accepted Answer

A) True 
 B)False

Question 16

Turnarounds are firms with valuable assets that are hidden on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 17

"Economic profit" is analogous to ____ in capital budgeting.

Accepted Answer

A)  Weighted average cost of capital 
B)  Internal rate of return 
C)  Composite discount rates 
D)  Discounted cashflows 
E)  Net present value 
A)  Weighted average cost of capital 
B)  Internal rate of return 
C)  Composite discount rates 
D)  Discounted cashflows 
E)  Net present value

Question 18

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

Accepted Answer

A) True 
 B)False

Question 19

In Berkshire Hathoway annual reports, Warren Buffet highlights financial tenants that he believes are important. Which of the following is not a financial tenant of Warren Buffet?

Accepted Answer

A)  Focus on return on equity (RO
E)  not earnings per share (EPS). 
B)  Calculate owner earnings similar to free cash flow after capital expenditures. 
C)  High profit margins relative to the industry. 
D)  Company should create at least one dollar of market value for every dollar retained. 
E)  All of the above are financial tenants of Warren Buffet. 
A)  Focus on return on equity (RO
E)  not earnings per share (EPS). 
B)  Calculate owner earnings similar to free cash flow after capital expenditures. 
C)  High profit margins relative to the industry. 
D)  Company should create at least one dollar of market value for every dollar retained. 
E)  All of the above are financial tenants of Warren Buffet.

Question 20

A growth company may exist for all of the following reasons except

Accepted Answer

A)  The company holds patents. 
B)  The company possess unique distribution or marketing strategies. 
C)  The company is in a competitive environment. 
D)  Significant barriers to entry exist. 
E)  All of the above are reasons a growth company may exist. 
A)  The company holds patents. 
B)  The company possess unique distribution or marketing strategies. 
C)  The company is in a competitive environment. 
D)  Significant barriers to entry exist. 
E)  All of the above are reasons a growth company may exist.

Which of the following is not considered a relative valuation technique?

When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

Which of the following statements concerning global company analysis is false?

A firm that follows a differentiation strategy

In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

To benefit from cost leadership a firm must command prices near the industry average.

While EVA is considered an internal performance measure, MVA is considered to be an external performance measure.

Which of the following are tenets of Warren Buffett?

A defensive company is one whose sales, earnings and cash flows are strongly correlated with the business cycle.

Turnarounds are firms with valuable assets that are hidden on the balance sheet.

"Economic profit" is analogous to ____ in capital budgeting.

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

In Berkshire Hathoway annual reports, Warren Buffet highlights financial tenants that he believes are important. Which of the following is not a financial tenant of Warren Buffet?

A growth company may exist for all of the following reasons except

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 9: Company Analysis and Stock Valuation

Which of the following is not considered a relative valuation technique?

When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

Which of the following statements concerning global company analysis is false?

A firm that follows a differentiation strategy

In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's weighted average cost of capital (WACC).

The constant growth dividend growth model is not appropriate for the valuation of growth companies.

To benefit from cost leadership a firm must command prices near the industry average.

While EVA is considered an internal performance measure, MVA is considered to be an external performance measure.

Which of the following are tenets of Warren Buffett?

A defensive company is one whose sales, earnings and cash flows are strongly correlated with the business cycle.

Turnarounds are firms with valuable assets that are hidden on the balance sheet.

"Economic profit" is analogous to ____ in capital budgeting.

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

In Berkshire Hathoway annual reports, Warren Buffet highlights financial tenants that he believes are important. Which of the following is not a financial tenant of Warren Buffet?

A growth company may exist for all of the following reasons except

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters