Question 1

The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

Accepted Answer

A)   $28.90
B)   $29.62
C)   $30.36
D)   $31.12
E)   $31.90 A

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
B)   To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT)  at the weighted average cost of capital.
C)   To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
D)   To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
E)   The corporate valuation model requires the assumption of a constant growth rate in all years. A

Question 3

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the Year 0 value of operations, in millions?

Accepted Answer

A)   $314.51
B)   $331.06
C)   $348.48
D)   $366.82
E)   $386.13 E

Question 4

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

A) True 
 B)False

Question 5

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Accepted Answer

A)   $16.28
B)   $16.70
C)   $17.13
D)   $17.57
E)   $18.01

Question 6

Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or terminal) value (in millions) at t = 5?

Accepted Answer

A)   $1,025
B)   $1,079
C)   $1,136
D)   $1,196
E)   $1,259

Question 7

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   These two stocks should have the same price.
B)   These two stocks must have the same dividend yield.
C)   These two stocks should have the same expected return.
D)   These two stocks must have the same expected capital gains yield.
E)   These two stocks must have the same expected year-end dividend.

Question 8

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%

Question 9

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Accepted Answer

A)   The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
B)   Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
C)   A stock's dividend yield can never exceed its expected growth rate.
D)   A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
E)   Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.

Question 10

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)   The expected return on the stock is 5% a year.
B)   The stock's dividend yield is 5%.
C)   The price of the stock is expected to decline in the future.
D)   The stock's required return must be equal to or less than 5%.
E)   The stock's price one year from now is expected to be 5% above the current price.

Question 11

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Accepted Answer

A)   $37.86
B)   $38.83
C)   $39.83
D)   $40.85
E)   $41.69

Question 12

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Accepted Answer

A)   6.62%
B)   6.82%
C)   7.03%
D)   7.25%
E)   7.47%

Question 13

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   Stock A must have a higher stock price than Stock B.
B)   Stock A must have a higher dividend yield than Stock B.
C)   Stock B's dividend yield equals its expected dividend growth rate.
D)   Stock B must have the higher required return.
E)   Stock B could have the higher expected return.

Question 14

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)   $40.35
B)   $41.82
C)   $43.33
D)   $44.85
E)   $46.42

Question 15

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Accepted Answer

A)   $0.95
B)   $1.05
C)   $1.16
D)   $1.27
E)   $1.40

Question 16

Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's value of operations, in millions?

Accepted Answer

A)   $200.00
B)   $210.53
C)   $221.05
D)   $232.11
E)   $243.71

Question 17

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's value of operations, in millions?

Accepted Answer

A)   $1,895
B)   $1,995
C)   $2,100
D)   $2,205
E)   $2,315

Question 18

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   Stock X has a higher dividend yield than Stock Y.
B)   Stock Y has a higher dividend yield than Stock X.
C)   One year from now, Stock X's price is expected to be higher than Stock Y's price.
D)   Stock X has the higher expected year-end dividend.
E)   Stock Y has a higher capital gains yield.

Question 19

Based on the corporate valuation model, the value of Chen Lin Inc.'s operations is $900 million. Its balance sheet shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of its stock price per share?

Accepted Answer

A)   $22.03
B)   $24.48
C)   $27.20
D)   $29.92
E)   $32.91

Question 20

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   The stock's required return is 10%.
B)   The stock's expected dividend yield and growth rate are equal.
C)   The stock's expected dividend yield is 5%.
D)   The stock's expected capital gains yield is 5%.
E)   The stock's expected price 10 years from now is $100.00.

Exam 9: Stocks and Their Valuation