Question 1

Which of the following formulas is INCORRECT?

Accepted Answer

A) Divt =   × Dividend Payout Rate 
B) PN =   
C) earnings growth rate = retention rate × return on new investment 
D) P0 =   +   + ...+   +   ×   
A) Divt =   × Dividend Payout Rate 
B) PN =   
C) earnings growth rate = retention rate × return on new investment 
D) P0 =   +   + ...+   +   ×

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) The most common valuation multiple is the price-earnings (P/
E) ratio. 
B) You should be willing to pay proportionally more for a stock with lower current earnings. 
C) A firm's P/E ratio is equal to the share price divided by its earnings per share. 
D) The intuition behind the use of the P/E ratio is that when you buy a stock,you are in a sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist. 
A) The most common valuation multiple is the price-earnings (P/
E) ratio. 
B) You should be willing to pay proportionally more for a stock with lower current earnings. 
C) A firm's P/E ratio is equal to the share price divided by its earnings per share. 
D) The intuition behind the use of the P/E ratio is that when you buy a stock,you are in a sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.

Question 3

What are some common multiples used to value stocks?

Accepted Answer

Price to earnings
Enterprise v

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues. 
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments,we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones. 
C) If the firm has no debt then rwacc = the risk-free rate of return. 
D) When using the discounted free cash flow model,we forecast the firm's free cash flow up to some horizon,together with some terminal (continuation)value of the enterprise. 
A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues. 
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments,we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones. 
C) If the firm has no debt then rwacc = the risk-free rate of return. 
D) When using the discounted free cash flow model,we forecast the firm's free cash flow up to some horizon,together with some terminal (continuation)value of the enterprise.

Question 5

Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years:   Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:

Accepted Answer

A) $49.50. 
B) $12.50. 
C) $19.35. 
D) $24.50. 
A) $49.50. 
B) $12.50. 
C) $19.35. 
D) $24.50.

Question 6

Use the information for the question(s)below.
Suppose that Texas Trucking (TT)has earnings per share of $3.45 and EBITDA of $45 million.TT also has 5 million shares outstanding and debt of $150 million (net of cash).You believe that Oklahoma Logistics and Transport (OLT)is comparable to TT in terms of its underlying business,but OLT has no debt.OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7.
-Based upon the price earnings multiple,the value of a share of Texas Trucking is closest to:

Accepted Answer

A) $49.30. 
B) $43.13. 
C) $24.15. 
D) $27.60. 
A) $49.30. 
B) $43.13. 
C) $24.15. 
D) $27.60.

Question 7

Use the following information to answer the question(s)below.  
-Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the average P/E ratio for its competitors,Novartis' stock price is closest to:

Accepted Answer

A) $13.00. 
B) $31.86. 
C) $43.47. 
D) $44.35. 
A) $13.00. 
B) $31.86. 
C) $43.47. 
D) $44.35.

Question 8

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's expected capital gains yield is closest to:

Accepted Answer

A) 4.0%. 
B) 6.4%. 
C) 8.2%. 
D) 10.0%. 
A) 4.0%. 
B) 6.4%. 
C) 8.2%. 
D) 10.0%.

Question 9

Use the following information to answer the question(s)below.  
-Assuming that Novartis AG (NVS)has a book value of $20.00 per share,based upon the price-to-book ratios for its competitors,the lowest expected stock price for Novartis is closest to:

Accepted Answer

A) $7.47. 
B) $13.00. 
C) $22.95. 
D) $44.60. 
A) $7.47. 
B) $13.00. 
C) $22.95. 
D) $44.60.

Question 10

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the:

Accepted Answer

A) enterprise value model. 
B) total payout model. 
C) dividend discount model. 
D) discounted free cash flow model. 
A) enterprise value model. 
B) total payout model. 
C) dividend discount model. 
D) discounted free cash flow model.

Question 11

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

Accepted Answer

A) $25.00. 
B) $15.00. 
C) $31.25. 
D) $27.50. 
A) $25.00. 
B) $15.00. 
C) $31.25. 
D) $27.50.

Question 12

Use the following information to answer the question(s)below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share)and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-Wyatt's expected EPS in two years is closest to:

Accepted Answer

A) $4.48. 
B) $4.64. 
C) $5.04. 
D) $5.38. 
A) $4.48. 
B) $4.64. 
C) $5.04. 
D) $5.38.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) A common approximation is to assume that in the long run,dividends will grow at a constant rate. 
B) The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate. 
C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. 
D) During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends. 
A) A common approximation is to assume that in the long run,dividends will grow at a constant rate. 
B) The dividend each year is the firm's earnings per share (EPS)multiplied by its dividend payout rate. 
C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. 
D) During periods of high growth,it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Even two firms in the same industry selling the same types of products,while similar in many respects,are likely to be of different size or scale. 
B) In the method of comparables,we estimate the value of the firm based on the value of other,comparable firms or investments that we expect will generate very similar cash flows in the future. 
C) Consider the case of a new firm that is identical to an existing publicly traded company.If these firms will generate identical cash flows,the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. 
D) A valuation multiple is a ratio of some measure of the firm's scale to the value of the firm. 
A) Even two firms in the same industry selling the same types of products,while similar in many respects,are likely to be of different size or scale. 
B) In the method of comparables,we estimate the value of the firm based on the value of other,comparable firms or investments that we expect will generate very similar cash flows in the future. 
C) Consider the case of a new firm that is identical to an existing publicly traded company.If these firms will generate identical cash flows,the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. 
D) A valuation multiple is a ratio of some measure of the firm's scale to the value of the firm.

Question 15

You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,the value of a share of Whirlpool stock based upon the comparables approach is closest to:

Accepted Answer

A) $103.70. 
B) $27.90. 
C) $35.90. 
D) $23.10. 
A) $103.70. 
B) $27.90. 
C) $35.90. 
D) $23.10.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) If the profit opportunities from having private information are large,other individuals will attempt to gain the expertise and devote the resources needed to acquire it. 
B) When private information is relegated to the hands of a relatively small number of investors,these investors may be able to profit by trading on their information. 
C) When a buyer seeks to buy a stock,the willingness of other parties to sell the same stock suggests that they value the stock differently. 
D) Since stock markets aggregate the information and views of many different investors,we expect the stock price to react slowly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock. 
A) If the profit opportunities from having private information are large,other individuals will attempt to gain the expertise and devote the resources needed to acquire it. 
B) When private information is relegated to the hands of a relatively small number of investors,these investors may be able to profit by trading on their information. 
C) When a buyer seeks to buy a stock,the willingness of other parties to sell the same stock suggests that they value the stock differently. 
D) Since stock markets aggregate the information and views of many different investors,we expect the stock price to react slowly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) There are two potential sources of cash flows from owning a stock. 
B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. 
C) An investor might generate cash by choosing to sell the shares at some future date. 
D) Because the cash flows from stock are known with certainty,we can discount them using the risk-free interest rate. 
A) There are two potential sources of cash flows from owning a stock. 
B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. 
C) An investor might generate cash by choosing to sell the shares at some future date. 
D) Because the cash flows from stock are known with certainty,we can discount them using the risk-free interest rate.

Question 18

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

A) $10.00. 
B) $15.00. 
C) $14.00. 
D) $12.50. 
A) $10.00. 
B) $15.00. 
C) $14.00. 
D) $12.50.

Question 19

What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

Accepted Answer

Comparable firms have similar

Question 20

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Accepted Answer

A) 3.0% and 7.0% respectively. 
B) 3.0% and 10.0% respectively. 
C) 4.0% and 6.0% respectively. 
D) 4.0% and 10.0% respectively. 
A) 3.0% and 7.0% respectively. 
B) 3.0% and 10.0% respectively. 
C) 4.0% and 6.0% respectively. 
D) 4.0% and 10.0% respectively.

Exam 9: Valuing Stocks

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE?

What are some common multiples used to value stocks?

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the average P/E ratio for its competitors,Novartis' stock price is closest to:

Use the following information to answer the question(s)below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's expected capital gains yield is closest to:

Use the following information to answer the question(s)below. -Assuming that Novartis AG (NVS)has a book value of $20.00 per share,based upon the price-to-book ratios for its competitors,the lowest expected stock price for Novartis is closest to:

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,the value of a share of Whirlpool stock based upon the comparables approach is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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