Question 1

Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method?

Accepted Answer

A)  calculations based upon widely available information 
B)  based upon actual stock prices of real firms 
C)  does not rely on estimates of future cash flows 
D)  takes into account important differences between different firms 
A)  calculations based upon widely available information 
B)  based upon actual stock prices of real firms 
C)  does not rely on estimates of future cash flows 
D)  takes into account important differences between different firms D

Question 2

On a certain date, Kastbro has a stock price of $42.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action?

Accepted Answer

A)  No, since the constant dividend growth rate gives a stock estimate of $42.50. 
B)  No, since the constant dividend growth rate gives a stock estimate greater than $42.50. 
C)  Yes, since the constant dividend growth rate gives a stock estimate greater than $42.50. 
D)  No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect. 
A)  No, since the constant dividend growth rate gives a stock estimate of $42.50. 
B)  No, since the constant dividend growth rate gives a stock estimate greater than $42.50. 
C)  Yes, since the constant dividend growth rate gives a stock estimate greater than $42.50. 
D)  No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect. D

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. 
B)  In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. 
C)  Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. 
D)  A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm. 
A)  Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. 
B)  In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. 
C)  Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. 
D)  A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm. D

Question 4

Use the figure for the question(s) below:  
-On a particular date, the above information concerning Office Depot, Incorporated, was given on Google Finance. Its competitor, Staples Incorporated, had a stock price of $24.33. Which of the following is closest to the EPS of Staples Incorporated if it is estimated using valuation multiples based on price-earnings ratios?

Accepted Answer

A)  $1.58 
B)  $1.84 
C)  $2.63 
D)  $14.15 
A)  $1.58 
B)  $1.84 
C)  $2.63 
D)  $14.15

Question 5

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected terminal enterprise value at year 4?

Accepted Answer

A)  $413.4 million 
B)  $459.3 million 
C)  $505.3 million 
D)  $528.2 million 
A)  $413.4 million 
B)  $459.3 million 
C)  $505.3 million 
D)  $528.2 million

Question 6

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

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  I and II 
A)  I only 
B)  II only 
C)  III only 
D)  I and II

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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 price-earnings ratio of comparable firms. 
B)  For valuation purposes, the trailing price-earnings 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 price-earnings ratio of comparable firms. 
B)  For valuation purposes, the trailing price-earnings 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 9

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

Accepted Answer

A) True 
 B)False

Question 10

Which of the following should be done by a manager wishing to raise his stock's price?
I. Focus on maximizing the present value (PV) of the free cash flow.
II. Focus on accounting earnings.
III. Focus on financial policy.

Accepted Answer

A)  I only 
B)  II only 
C)  I and II 
D)  II and II 
A)  I only 
B)  II only 
C)  I and II 
D)  II and II

Question 11

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 a firm's revenues. 
B)  Since a 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 net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. 
C)  If a firm has no debt, then rwacc equals the risk-free rate of return. 
D)  When using the discounted free cash flow model, we forecast a 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 a firm's revenues. 
B)  Since a 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 net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. 
C)  If a firm has no debt, then rwacc equals the risk-free rate of return. 
D)  When using the discounted free cash flow model, we forecast a firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.

Question 12

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly, if free cash flow is calculated based on EBIT.

Accepted Answer

A) True 
 B)False

Question 13

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrum's expected current share price?

Accepted Answer

A)  $12.61 
B)  $16.40 
C)  $20.18 
D)  $20.81 
A)  $12.61 
B)  $16.40 
C)  $20.18 
D)  $20.81

Question 14

Which of the following statements is FALSE?

Accepted Answer

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

Question 15

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorian's stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorian's stock?

Accepted Answer

A)  Sell any Praetorian stock that she owns. 
B)  Short Praetorian's stock. 
C)  Revise Praetorian's equity cost of capital. 
D)  Revise her estimate of Praetorian's dividend growth. 
A)  Sell any Praetorian stock that she owns. 
B)  Short Praetorian's stock. 
C)  Revise Praetorian's equity cost of capital. 
D)  Revise her estimate of Praetorian's dividend growth.

Question 16

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?

Accepted Answer

A)  $14.37 
B)  $11.87 
C)  $12.49 
D)  $16.24 
A)  $14.37 
B)  $11.87 
C)  $12.49 
D)  $16.24

Question 17

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

Accepted Answer

A) True 
 B)False

Question 18

If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________.

Accepted Answer

A)  the discounted free cash flow model 
B)  the dividend-discount model 
C)  the enterprise value model 
D)  None of the above models can be used if you do not want to forecast dividends or use of debt. 
A)  the discounted free cash flow model 
B)  the dividend-discount model 
C)  the enterprise value model 
D)  None of the above models can be used if you do not want to forecast dividends or use of debt.

Question 19

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. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

Accepted Answer

A)  P/E 
B)  Price/Book 
C)  Enterprise Value/Sales 
D)  Enterprise Value/EBITDA 
A)  P/E 
B)  Price/Book 
C)  Enterprise Value/Sales 
D)  Enterprise Value/EBITDA

Question 20

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

Accepted Answer

A) True 
 B)False

Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method?

Which of the following statements is FALSE?

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.

Which of the following statements is FALSE?

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

Which of the following should be done by a manager wishing to raise his stock's price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focus on financial policy.

Which of the following statements is FALSE?

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly, if free cash flow is calculated based on EBIT.

Which of the following statements is FALSE?

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________.

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. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Exam 10: Stock Valuation: a Second Look

Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method?

Which of the following statements is FALSE?

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.

Which of the following statements is FALSE?

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

Which of the following should be done by a manager wishing to raise his stock's price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focus on financial policy.

Which of the following statements is FALSE?

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly, if free cash flow is calculated based on EBIT.

Which of the following statements is FALSE?

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________.

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. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters