Question 1

In SWOT analysis, one examines all of the following factors, except

Accepted Answer

A)  Strengths. 
B)  Weaknesses. 
C)  Opportunities. 
D)  Threats. 
E)  Turnarounds. 
A)  Strengths. 
B)  Weaknesses. 
C)  Opportunities. 
D)  Threats. 
E)  Turnarounds.

Question 2

A set of performance measures called ___________ are directly related to the capital budgeting techniques used in corporate finance.

Accepted Answer

A)  Dividend discount model 
B)  Aggressive growth indexes 
C)  Growth indexes 
D)  Value added 
E)  Profit sensitization 
A)  Dividend discount model 
B)  Aggressive growth indexes 
C)  Growth indexes 
D)  Value added 
E)  Profit sensitization

Question 3

Which of the following factors does not indicate market liquidity?

Accepted Answer

A)  Number of shareholders 
B)  High price volatility 
C)  Number of shares outstanding 
D)  Number of shares traded 
E)  Institutional interest 
A)  Number of shareholders 
B)  High price volatility 
C)  Number of shares outstanding 
D)  Number of shares traded 
E)  Institutional interest

Question 4

Exhibit 9-7
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE. $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 10 \% \
2011 & 15 \% \
2012 & 20 \% \
2013 & 25 \% \
2014 & 20 \% \
2015 & 15 \% \
2016 & 10 \% \
2017 & 7 \%
\end{array}$$ 
From year 2018 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 9-7. Calculate the present value now (Year 2009) of FCFE during the period of constant growth (that is for years 2018 onwards).

Accepted Answer

A)  $7,153,368 
B)  $9,703,476 
C)  $15,558,341 
D)  $8,986,012 
E)  $6,789,125 
A)  $7,153,368 
B)  $9,703,476 
C)  $15,558,341 
D)  $8,986,012 
E)  $6,789,125

Question 5

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 present value now (Year 2009) of OFCF during the period of declining growth (that is for years 2010 to 2013).

Accepted Answer

A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326 
A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326

Question 6

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 required rate of return on equity.

Accepted Answer

A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3% 
A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3%

Question 7

Exhibit 9-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The Valentine Company currently has a 14% annual growth rate while the market average is 4%. The market multiple is 15.
-Refer to Exhibit 9-4. Determine the P/E ratio for the Valentine Company assuming Valentine can maintain its superior growth rate for the next 5 years.

Accepted Answer

A)  23.7 
B)  16.4 
C)  15.3 
D)  8.3 
E)  3.8 
A)  23.7 
B)  16.4 
C)  15.3 
D)  8.3 
E)  3.8

Question 8

Given Gilbert's beta of 1.10 and a risk free rate of 5%, what is the expected rate of return assuming a 10% market return?

Accepted Answer

A)  21.5% 
B)  10.5% 
C)  5.5% 
D)  15.5% 
E)  16.5% 
A)  21.5% 
B)  10.5% 
C)  5.5% 
D)  15.5% 
E)  16.5%

Question 9

The expected rate of return on Rewind Industries is 2.5 times the 12% expected rate of return from the market. What is Rewind's beta if the risk free rate is 6%?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5 
E)  6 
A)  2 
B)  3 
C)  4 
D)  5 
E)  6

Question 10

Exhibit 9-7
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE. $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 10 \% \
2011 & 15 \% \
2012 & 20 \% \
2013 & 25 \% \
2014 & 20 \% \
2015 & 15 \% \
2016 & 10 \% \
2017 & 7 \%
\end{array}$$ 
From year 2018 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 9-7. Calculate the present value now (Year 2009) of FCFE during the period of declining growth (that is for years 2014 to 2017).

Accepted Answer

A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171 
A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171

Question 11

What is the implied growth duration of Bowe Industries given the following: $\begin{array}{lcc} 
& \text { S\&P/TSX Industrials } & \text { Bowe Industries } \
\hline  \text { P/E Ratios } & 15 & 25 \
\text { Average Growth }(\%) & 5.0 & 15.0 \
\text { Dividend Yield } & 06 & 02
\end{array}$

Accepted Answer

A)  3.2 years 
B)  6.6 years 
C)  8.6 years 
D)  9.7 years 
E)  10.6 years 
A)  3.2 years 
B)  6.6 years 
C)  8.6 years 
D)  9.7 years 
E)  10.6 years

Question 12

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

Accepted Answer

A) True 
 B)False

Question 13

What variables impact the Price/Sales ratio?

Accepted Answer

A)  Sales growth rate, volatility of sales growth, profit margin 
B)  Earnings growth rate, volatility of sales growth, profit margin 
C)  Earnings growth rate, volatility of sales growth, operating margin 
D)  Sales growth rate, volatility of sales growth, operating margin 
E)  Sales growth rate, volatility of profit margin, profit margin 
A)  Sales growth rate, volatility of sales growth, profit margin 
B)  Earnings growth rate, volatility of sales growth, profit margin 
C)  Earnings growth rate, volatility of sales growth, operating margin 
D)  Sales growth rate, volatility of sales growth, operating margin 
E)  Sales growth rate, volatility of profit margin, profit margin

Question 14

The Peterson Company has FCFF of $1000. FCFF is expected to grow by 12% next year. The cost of capital is 12% and the level of debt is $5000. The number of shares outstanding is 500. Calculate the firm's share price.

Accepted Answer

A)  $44 
B)  $55 
C)  $34.19 
D)  $47.23 
E)  $50 
A)  $44 
B)  $55 
C)  $34.19 
D)  $47.23 
E)  $50

Question 15

Exhibit 9-1
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) The firm's expected rate of growth of earning per share
(2) The amount of capital invested in growth investments
(3) The rate of return earned on the funds relative to the required rate of return
(4) The required rate of return on the security based on its systematic risk
(5) The firm's dividend payout ratio
(6) The time horizon when these growth investments will be available
-Refer to Exhibit 9-1. In the listing above, which three factors influence the capital gain component of a growth company?

Accepted Answer

A)  1, 3, and 5 
B)  2, 3, and 4 
C)  2, 3, and 6 
D)  3, 4, and 5 
E)  3, 4, and 6 
A)  1, 3, and 5 
B)  2, 3, and 4 
C)  2, 3, and 6 
D)  3, 4, and 5 
E)  3, 4, and 6

Question 16

Exhibit 9-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. $\begin{array}{llcc}
  \text {LIFO reserve  } & 60 \
 \text { Net plant, property, and equipment  } & 1325 \
  \text { Other assets  } &30  \
 \text {Goodwill  } &325  \
  \text {  Accumulated Goodwill amortized  } &  65\
 \text { PV of Operating leases } & 140 \
  \text { Tax benefit from interest on expenses   } &  10\
 \text {Tax benefit from interest on leases   } &5  \
  \text { Taxes on non-operating income  } &2  \
 \text {Implied interest on op. lease  } & 9.5 \
  \text {   Increase in LIFO reserve  } & 12 \
 \text { Goodwill amortization  } & 15 \
  \text { Operating profit   } &  550\
 \text { Income tax expense  } & 215 \
  \text {  Net working capital  } & 440 \
 \text { WACC } &  0.12\
\end{array}$

-Refer to Exhibit 9-6. Calculate the dollar cost of capital.

Accepted Answer

A)  286.2 
B)  207 
C)  234.36 
D)  238.44 
E)  302.9 
A)  286.2 
B)  207 
C)  234.36 
D)  238.44 
E)  302.9

Question 17

The franchise P/E is a function of

Accepted Answer

A)  Relative rate of return on new business opportunities 
B)  Size of superior return opportunities. 
C)  Duration of earnings growth. 
D)  Choices a and b. 
E)  Choices a, b, and c. 
A)  Relative rate of return on new business opportunities 
B)  Size of superior return opportunities. 
C)  Duration of earnings growth. 
D)  Choices a and b. 
E)  Choices a, b, and c.

Question 18

The expected rate of return on Research Industries is twice the 12% expected rate of return from the market. What is Research's beta if the risk free rate is 6%?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5 
E)  6 
A)  2 
B)  3 
C)  4 
D)  5 
E)  6

Question 19

Exhibit 9-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. $\begin{array}{llcc}
  \text {LIFO reserve  } & 60 \
 \text { Net plant, property, and equipment  } & 1325 \
  \text { Other assets  } &30  \
 \text {Goodwill  } &325  \
  \text {  Accumulated Goodwill amortized  } &  65\
 \text { PV of Operating leases } & 140 \
  \text { Tax benefit from interest on expenses   } &  10\
 \text {Tax benefit from interest on leases   } &5  \
  \text { Taxes on non-operating income  } &2  \
 \text {Implied interest on op. lease  } & 9.5 \
  \text {   Increase in LIFO reserve  } & 12 \
 \text { Goodwill amortization  } & 15 \
  \text { Operating profit   } &  550\
 \text { Income tax expense  } & 215 \
  \text {  Net working capital  } & 440 \
 \text { WACC } &  0.12\
\end{array}$

-Refer to Exhibit 9-6. Calculate the capital for the firm.

Accepted Answer

A)  1725 
B)  1953 
C)  2524 
D)  2385 
E)  1987 
A)  1725 
B)  1953 
C)  2524 
D)  2385 
E)  1987

Question 20

ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average growth rate of its dividends.

Accepted Answer

A)  1.16% 
B)  1.80% 
C)  12.47% 
D)  15.83% 
E)  None of the above 
A)  1.16% 
B)  1.80% 
C)  12.47% 
D)  15.83% 
E)  None of the above

In SWOT analysis, one examines all of the following factors, except

A set of performance measures called ___________ are directly related to the capital budgeting techniques used in corporate finance.

Which of the following factors does not indicate market liquidity?

Given Gilbert's beta of 1.10 and a risk free rate of 5%, what is the expected rate of return assuming a 10% market return?

The expected rate of return on Rewind Industries is 2.5 times the 12% expected rate of return from the market. What is Rewind's beta if the risk free rate is 6%?

What is the implied growth duration of Bowe Industries given the following: S\&P/TSX Industrials Bowe Industries P/E Ratios 15 25 Average Growth (\%) 5.0 15.0 Dividend Yield 06 02

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

What variables impact the Price/Sales ratio?

The Peterson Company has FCFF of $1000. FCFF is expected to grow by 12% next year. The cost of capital is 12% and the level of debt is $5000. The number of shares outstanding is 500. Calculate the firm's share price.

The franchise P/E is a function of

The expected rate of return on Research Industries is twice the 12% expected rate of return from the market. What is Research's beta if the risk free rate is 6%?

ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average growth rate of its dividends.

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

In SWOT analysis, one examines all of the following factors, except

A set of performance measures called ___________ are directly related to the capital budgeting techniques used in corporate finance.

Which of the following factors does not indicate market liquidity?

Given Gilbert's beta of 1.10 and a risk free rate of 5%, what is the expected rate of return assuming a 10% market return?

The expected rate of return on Rewind Industries is 2.5 times the 12% expected rate of return from the market. What is Rewind's beta if the risk free rate is 6%?

What is the implied growth duration of Bowe Industries given the following: S\&P/TSX Industrials Bowe Industries P/E Ratios 15 25 Average Growth (\%) 5.0 15.0 Dividend Yield 06 02

A cyclical company's sales and earnings are heavily influenced by aggregate business activity.

What variables impact the Price/Sales ratio?

The Peterson Company has FCFF of $1000. FCFF is expected to grow by 12% next year. The cost of capital is 12% and the level of debt is $5000. The number of shares outstanding is 500. Calculate the firm's share price.

The franchise P/E is a function of

The expected rate of return on Research Industries is twice the 12% expected rate of return from the market. What is Research's beta if the risk free rate is 6%?

ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average growth rate of its dividends.

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