Question 1

Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondale's free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondale's stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%?

Accepted Answer

A) no effect 
B) rise by $5.15 
C) rise by $6.43 
D) rise by $7.72

Question 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?

Accepted Answer

A) The price of the stock would rise. 
B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high. 
C) Investors would increase their forecast of future cash flows in that firm. 
D) Investors would revise their estimates of the net present value (NPV)of the firm.

Question 3

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

Question 4

On a certain date, Kastbro has a stock price of $37.50, 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 $37.50. 
B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. 
C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. 
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.

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?

Accepted Answer

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

Question 6

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

Question 7

General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price?

Accepted Answer

A) $7.78 
B) $8.17 
C) $9.34 
D) $11.67

Question 8

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?

Accepted Answer

A) $1429.79 million 
B) $86.61 million 
C) $1572.77 million 
D) $96.24 million

Question 9

Which is the best valuation technique when using comparables?

Accepted Answer

The answer of Which is the best valuation technique when...

Question 10

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 11

Which of the following statements is FALSE?

Accepted Answer

A) A firm's weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. 
B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model, a firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. 
C) We interpret rwacc as the expected return a firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. 
D) When using the discounted free cash flow model, we should use a firm's equity cost of capital.

Question 12

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?

Accepted Answer

A) $1384.24 
B) $1245.82 
C) $1107.39 
D) $968.97

Question 13

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

Question 14

Which of the following statements concerning the valuation of firms using the method of comparables is FALSE?

Accepted Answer

A) If two different firms generate identical cash flows, the Law of One Price will imply that both firms have the same value. 
B) Comparables adjust for scale differences when valuing similar firms. 
C) Valuation multiples take into account differences in the risk and future growth between the firms being compared. 
D) Two firms that sell very similar products or offer very similar services will have different values if they are of different sizes.

Question 15

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.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) Investors with information that a stock had a positive net present value (NPV)will buy it, while investors with information that a stock had a negative net present value (NPV)will sell it. 
B) Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows. 
C) Competition between investors works to make the net present value (NPV)of all trading opportunities zero. 
D) A share's price is the aggregate of the information of many investors.

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.

Question 19

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

Question 20

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

Accepted Answer

The answer of What are the implications of the efficient...

Exam 10: Stock Valuation: a Second Look

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?

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 is the best valuation technique when using comparables?

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?

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 concerning the valuation of firms using the method of comparables is FALSE?

Which of the following statements is FALSE?

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

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

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

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