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Exam 7: Corporate Valuation and Stock Valuation

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Question 41

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Heath and Logan Inc.forecasts the free cash flows (in millions) shown below.The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3.Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions? $\begin{array} { l c c c } \text { Year: } & 1 & 2 & 3 \\\hline \text { Free cash flow: } & - \$ 15 & \$ 10 & \$ 40\end{array}$

A) $315
B) $331
C) $348
D) $367
E) $386

F) A) and E)
G) A) and B)

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Question 42

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Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

A) 8.03%
B) 8.24%
C) 8.45%
D) 8.67%
E) 8.89%

F) B) and D)
G) A) and E)

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Question 43

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A share of Lash Inc.'s 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?

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

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

The free cash flows (in millions) shown below are forecast by Simmons Inc.If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions? $\begin{array} { l c c c } \text { Year: } & 1 & 2 & 3 \\\hline \text { Free cash flow: } & - \$ 20 & \$ 42 & \$ 45\end{array}$

The projected cash flow for the next year for Minesuah Inc.is $100,000, and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%, what is the value of its operations?

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

A stock is expected to pay a year-end dividend of $2.00, i.e., D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%) .If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

If D₀ = $1.75, g (which is constant) = 3.6%, and P₀ = $32.00, what is the stock's expected total return for the coming year?

The required return for Williamson Heating's stock is 12%, and the stock sells for $40 per share.The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D₄ = $1.00(1.30) ⁴ = $2.8561.After t = 4, the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4, i.e., what is X?

The value of Broadway-Brooks Inc.'s operations is $900 million, based on the free cash flow valuation model.Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $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 the stock's price per share?

Which of the following statements is NOT CORRECT?

A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%.What is the current value of operations?

The free cash flow valuation model cannot be used unless a company doesn't pay dividends.

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25) .The stock sells for $32.50 per share, and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate, g, forever.What is the equilibrium expected growth rate?

Connor Publishing'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?

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

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

Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below.Assuming a required return of 11.00%, what is your estimate of the stock's current value? $\begin{array} { l c c c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \\\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506\end{array}$