Question 1

Which one of the following is a common term for the market consensus value of the required return on a stock?

Accepted Answer

A)   dividend payout ratio
B)   intrinsic value
C)   market capitalization rate
D)   plowback ratio C

Question 2

The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

Accepted Answer

A)   $269 million
B)   $296 million
C)   $305 million
D)   $327 million A

Question 3

Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities?

Accepted Answer

A)   $25
B)   $50
C)   $83.33
D)   $208 A

Question 4

Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?

Accepted Answer

A)   $25
B)   $50
C)   $75
D)   $100

Question 5

If a firm increases its plowback ratio, this will probably result in ________ P/E ratio.

Accepted Answer

A)   a higher
B)   a lower
C)   an unchanged
D)   The answer cannot be determined from the information given.

Question 6

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

Accepted Answer

A)   $679.81 million
B)   $715.54 million
C)   $769.23 million
D)   $803.03 million

Question 7

Value stocks are more likely to have a PEG ratio ________.

Accepted Answer

A)   less than 1
B)   equal to 1
C)   greater than 1
D)   less than zero

Question 8

A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

Accepted Answer

A)   $57
B)   $65
C)   $75
D)   $95

Question 9

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Accepted Answer

A)   book value per share
B)   liquidation value per share
C)   market value per share
D)   Tobin's q

Question 10

When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO?

Accepted Answer

A)   92%
B)   87%
C)   77%
D)   64%

Question 11

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the CAPM, the return you should require on the stock is ________.

Accepted Answer

A)   7.25%
B)   10.25%
C)   14.75%
D)   21%

Question 12

Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:
I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.

Accepted Answer

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

Question 13

You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A ________.

Accepted Answer

A)   will be higher than the intrinsic value of stock B
B)   will be the same as the intrinsic value of stock B
C)   will be less than the intrinsic value of stock B
D)   The answer cannot be determined from the information given.

Question 14

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth ________ today.

Accepted Answer

A)   $63.80
B)   $65.13
C)   $67.95
D)   $85.60

Question 15

An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM).

Accepted Answer

A)   less than
B)   equal to
C)   greater than
D)   greater than or equal to

Question 16

A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

Accepted Answer

A)   27 years
B)   37 years
C)   55 years
D)   75 years

Question 17

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the constant-growth DDM, the intrinsic value of the stock is ________.

Accepted Answer

A)   $4
B)   $17.65
C)   $37.50
D)   $50

Question 18

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

Accepted Answer

A)   $1 billion
B)   $2 billion
C)   $3 billion
D)   $4 billion

Question 19

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

Accepted Answer

A)   start-up phase
B)   consolidation
C)   maturity
D)   relative decline

Question 20

Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is ________.

Accepted Answer

A)   $16.67
B)   $25
C)   $37.50
D)   $40.83

Exam 13: Equity Valuation