Deck 8: Frameworks for Valuation

Question 1

The framework for valuation that compresses free cash flow and the interest tax shield into one number,making it difficult to compare operating performance among companies and over time,is the:

A)Discounted economic profit model.
B)Capital cash flow model.
C)Equity cash flow model.
E )Enterprise discounted cash flow (DCF )model.

Answer 1

B

Question 2

Use the following information below to answer the question. NOPLATt₊₁ = $72.2m
NOPLAT growth rate = 3%
Return on new invested capital = 11.2%
Weighted average cost of capital = 7.4%
Which of the following is closest to the continuing value in year t?

A)$1,005m
B)$1,201m
C)$4,485m
D)$6,126m

Answer 2

B

Question 3

In the APV approach,why is the unlevered cost of equity used instead of the WACC?

A)To account for retained earnings risk.
B)To avoid measuring the impact of debt.
C)To value the company as if it were all equity financed.
D)To incorporate the risk of newly issued shares.

Answer 3

C

Question 4

Preferred stock in well-established companies more closely resembles unsecured debt than equity.

Question 5

Given the following data,what is the enterprise value of the company? $$\begin{array} { | l | r | } \hline \text { Free cash flow (FCF) for year } 1 & \$ 50 \mathrm {~m} \\\hline \text { FCF for year } 2 & \$ 50 \mathrm {~m} \\\hline \text { Continuing value of FCF at t = 2 } & \$ 291.6 \mathrm {~m} \\\hline \text { Interest tax shield (ITS) for year } 1 & \$ 5 \mathrm {~m} \\\hline \text { ITs for year } 2 & \$ 5 \mathrm {~m} \\\hline \text { Continuing value of ITS at t = } 2 & \$ 17.5 \mathrm {~m} \\\hline \text { Unlevered cost of equity } & 8 \% \\\hline \text { Wacc } & 7 \% \\\hline \text { Midyear adjustment factor } & \$ 4 \mathrm {~m} \\\hline \text { Excess cash and investments } & \$ 18 \mathrm {~m} \\\hline\end{array}$$

A)$301m
B)$285m
C)$349m
D)$100m

Question 6

Which of the following is best to use when valuing a financial institution?

A)Enterprise discounted cash flow model.
B)Adjusted present value (APV).
C)Equity cash flow model.
D)Capital cash flow model.

Question 7

List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.

Question 8

Operating leases represent the most common form of off-balance-sheet debt.

Question 9

Bigger Brewing Co.is a U.S.-based company that is undergoing a leveraged buyout with a projected capital structure of 80 percent debt in the near term.There is a projected loan repayment schedule,with the goal of having a capital structure of 50 percent debt in three years.Based on this information,the best methodology to value this firm would be the enterprise discounted cash flow methodology.

Question 10

Which of the following valuation methods use(s )the weighted average cost of capital (WACC )as the discount factor?
I.The economic profit model.
II.The adjusted present value model.
III.The discounted cash flow model.
IV.None of the above.

A)I and II only.
B)I and III only.
C)II and III only.
D)IV.

Question 11

Given the following information,compute the estimated value per share. $$\begin{array} { | l | r | } \hline \text { Present value of cash flow } & \$ 25 \mathrm {~m} \\\hline \text { Midyear adjustment factor } & \$ 0.6 \mathrm {~m} \\\hline \text { Value of tax loss carryforwards } & \$ 1 \mathrm {~m} \\\hline \text { Value of debt } & \$ 8.6 \mathrm {~m} \\\hline \text { Value of capitaliced operating leases } & \$ 2.2 \mathrm {~m} \\\hline \text { Number of shares outstanding } & 8 \mathrm {~m} \\\hline\end{array}$$

A)$5.00
B)$4.68
C)$7.55
D)$11.2

Question 12

When valuing a parent company that owns less than 100 percent of a subsidiary,the minority interest holder of the subsidiary has a claim on the company's assets.

Question 13

A firm is financed with 62 percent debt and 38 percent equity.The pretax costs of debt and equity capital are 6.6 percent and 11.3 percent,respectively.What is the tax rate if the WACC is 7 percent?

A)31 percent.
B)34 percent.
C)37 percent.
D)64 percent.

Question 14

Given the following information,compute the estimated value per share. $$\begin{array} { | l | r | } \hline \text { Present value of cash flow: } & \$ 33 \mathrm {~m} \\\hline \text { Midyear adjustment factor: } & \$ 1.2 \mathrm {~m} \\\hline \text { Value of tax Ioss c amy-forwards: } & \$ 2.9 \mathrm {~m} \\\hline \text { Value of debt: } & \$ 14.4 \mathrm {~m} \\\hline \begin{array} { l } \text { Value of capitalized operating } \\\text { leases: }\end{array} & \$ 5.2 \mathrm {~m} \\\hline \text { Number of shares outstanding: } & 2.5 \mathrm {~m} \\\hline\end{array}$$

A)$5.80
B)$6.04
C)$7.00
D).$7.92

Question 15

Enterprise DCF and economic-profit models differ with respect to the discount rate used to estimate the future income streams.

Question 16

Since employee options represent just the possibility of acquiring stock instead of an obligation,the value of these options should not be factored into estimating the equity value.

Question 17

Use the following information to find the NOPLAT in year t+1 that yields the continuing value expressed below. NOPLATt₊₁ = ?
NOPLAT growth rate = 1.5%
Return on new invested capital = 9%
Weighted average cost of capital = 6.8%
Continuing value = $1,750

A)$111m
B)$95m
C)$105m
D)$184m