Exam 10: Stock Valuation: a Second Look

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?

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

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?

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

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 $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?

Gonzales Corporation generated free cash flow of $88 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 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2?

On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement?

Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. 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 $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Disposition effect is the tendency of individual investors to ________.

Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

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?

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 $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?

What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?

A study of trading behavior of individual investors at a discount brokerage found that individual investors ________.

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. 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?

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?

Which of the following is the best statement of the efficient markets hypothesis?