Exam 18: Equity Valuation Models

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%.The stock of Sunshine Corporation has a beta of 0.75.The intrinsic value of the stock is

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 11% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

High P/E ratios tend to indicate that a company will _______, ceteris paribus.

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00.After year 3, per share FCFE is expected to grow at the rate of 10% per year.An appropriate required return for the stock is 14%.The stock should be worth _______ today.

One of the problems with attempting to forecast stock market values is that

Consider the free cash flow approach to stock valuation.Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year.The firm's corporate tax rate is 30%.It is expected that $200,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $100,000.After the coming year, cash flows are expected to grow at 6% per year.The appropriate market-capitalization rate for unleveraged cash flow is 15% per year.The firm has no outstanding debt.The projected free cash flow of Utica Manufacturing Company for the coming year is

JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54.After year 3, dividends are expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.

Think Tank Company has an expected ROE of 26%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 9% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Suppose that the average P/E multiple in the gas industry is 17.KMP is expected to have an EPS of $5.50 in the coming year.The intrinsic value of KMP stock should be

Many stock analysts assume that a mispriced stock will

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%.The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock?

A version of earnings management that became common in the 1990s was

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90.Given this information, it follows that

Suppose that the average P/E multiple in the oil industry is 22.Exxon is expected to have an EPS of $1.50 in the coming year.The intrinsic value of Exxon stock should be

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

_________ is equal to common shareholders' equity divided by common shares outstanding.

Highpoint had a FCFE of $246M last year and has 123M shares outstanding.Highpoint's required return on equity is 10%, and WACC is 9%.If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is