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Exam 7: Valuation of Stocks and Corporations

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Question 21

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Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

A) All common stocks, regardless of class, must have the same voting rights.
B) All firms have several classes of common stock.
C) All common stock, regardless of class, must pay the same dividend.
D) Some class or classes of common stock are entitled to more votes per share than other classes.
E) All common stocks fall into one of three classes: A, B, and C.

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

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Question 22

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The preemptive right is important to shareholders because it

A) will result in higher dividends per share.
B) is included in every corporate charter.
C) protects the current shareholders against a dilution of their ownership interests.
D) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
E) allows managers to buy additional shares below the current market price.

F) B) and E)
G) C) and D)

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Question 23

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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?

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? Eagnected diviend $D _ { 1 }$         $3.00 Curtent Price, $P _ { 0 }$           $50 Eogpected constant prowth rate      6.0%

Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Based on the corporate valuation model,Bizzaro Co.'s value of operations is $300 million.The balance sheet shows $20 million of short-term investments that are unrelated to operations,$50 million of accounts payable,$90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.Bizzaro has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

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? $\begin{array}{lccc}\text { Year: } & 1 & 2 & 3 \\ \text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45\end{array}$

If D₁ = $1.25,g (which is constant) = 5.5%,and P₀ = $44,what is the stock's expected total return for the coming year?

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?                                               $\text {\underline{ A} }$       $\text {\underline{ B} }$ $\begin{array}{lll}\text { Required return } & 10 \% & 12 \% \\\text { Market price } & \$ 25 & \$ 40 \\\text { Expected growth } & 7 \% & 9 \%\end{array}$

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?

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

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? $\begin{array}{lcc}&\underline { X } & \underline { Y } \\\text { Price } & \$ 25 & \$ 25 \\\text { Expected dividend yield } & 5 \% & 3 \% \\\text { Required return } & 12 \% & 10 \%\end{array}$

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

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? $\begin{array} { l c c } \text { } & \underline{ \mathrm { A } } & \underline{ \mathrm { B } } \\\text { Price } & \$ 25 & \$ 25\\\text { Ejgidected growth (canstant) } & 10 \% & 5 \% \\\text { Required return } & 15 \% & 15 \%\end{array}$

When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.

From an investor's perspective,a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However,from a corporate issuer's standpoint,these risk relationships are reversed: Bonds are the most risky for the firm,preferred is next,and common is least risky.

Kinkead Inc.forecasts that its free cash flow in the coming year,i.e.,at t = 1,will be -$10 million,but its FCF at t = 2 will be $20 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%,what is the firm's value of operations,in millions?

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.