Exam 7: Valuing Stocks

Use the information for the question(s) below. Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 8%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. Suppose the weighted average cost of capital is 10% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding. -What is Gonzales Corporation's expected free cash flow in year 2?

A study of trading behavior of individual investors at a discount brokerage found that individual investors

The net present value (NPV)of a stock is calculated by discounting cash flows arising from this stock using the risk-free interest rate.

What are the major limitations of the dividend-discount model?

Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?

You expect KT industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

If a manager wishes to raise his stock's price,he should do which of the following? I.Focus on maximizing the present value (PV)of the free cash flow. II Focus on accounting earnings. III)Focus on financial policy.

Use the table for the question(s) below. -Valuation models use the relationship between share value,future cash flows,and the cost of capital to estimate these quantities for a given firm.Realistically,for a publicly traded firm,what can we reliably use such models to determine? I.the firm's future cash flows II the firm's cost of capital III the firm's stock price

Use the table for the question(s) below. -The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry.Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

If you want to value a firm but do not want to explicitly forecast its dividends,share repurchases ,or its use of debt,what is the simplest model for you to use?

Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount indefinitely.If Matilda's equity cost of capital is 12%,which of the following would be expected to be closest to Matilda's stock price?

Wellington Corporation is expected to pay a monthly dividend of $0.12 for the next three years.If the current price of Wellington stock is $41.35,and Wellington's equity cost of capital is 15% per year,what price would you expect Wellington's stock to sell for at the end of the three years?

Which of the following situations is a potential source of cash flows for a shareholder of a certain stock? I.The investor may be able to sell the shares at a future date. II)The firm in which the shares are held might pay out cash to shareholders in the form of dividends. III)The firm in which the shares are held might increase the value of its shares by reducing the total number of shares outstanding.

Use the table for the question(s) below. -Conundrum Mining is expected to generate the above free cash flows over the next four years,after which they are expected to grow at a rate of 5% per year.If the weighted average cost of capital is 12% and Conundrum has cash of $80 million,debt of $60 million,and 30 million shares outstanding,what is Conundrum's expected terminal enterprise value?

Kirkevue Industries pays out all its earnings as dividends and has a share price of $24.In order to expand,Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained funds.What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?

Use the table for the question(s) below. -The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry.Another newspaper publishing firm (not shown)had sales of $620 million,EBITDA of $84 million,excess cash of $66 million,$14 million of debt,and 120 million shares outstanding.If the firm had an EPS of $0.48,what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used?

Use the table for the question(s) below. -Banco Industries expects sales to grow at a rapid rate over the next 3 years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.Banco Industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding.If Banco Industries can reduce their operating expenses so that EBIT becomes 12% of sales,by how much will their stock price increase?

The Valuation Principle states that the value of a stock is equal to the present value (PV)of both the dividends and future sale price of that stock which the investor will receive.

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly.

A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?