Question 1

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

Accepted Answer

A)  These two stocks must have the same dividend yield. 
B)  These two stocks should have the same expected return. 
C)  These two stocks must have the same expected capital gains yield. 
D)  These two stocks must have the same expected year-end dividend. 
E)  These two stocks should have the same price.

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF0 in millions?

Accepted Answer

A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40

Question 4

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?

Accepted Answer

A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40

Question 5

A company is expected to have free cash flows of $0.75 million next year.The weighted average cost of capital is WACC = 10.5%, and the expected constant growth rate is g = 6.4%.The company has $2 million in short-term investments, $2 million in debt, and 1 million shares.What is the stock's current intrinsic stock price?

Accepted Answer

A)  $17.39 
B)  $17.84 
C)  $18.29 
D)  $18.75 
E)  $19.22

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B)  The stock valuation model, P0 = D1/(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
D)  The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. 
E)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  The stock valuation model, P0 = D1/(rs − g), cannot be used for firms that have negative growth rates. 
D)  The stock valuation model, P0 = D1/(rs − g), can be used only for firms whose growth rates exceed their required returns. 
E)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

Question 8

Decker Tires' free cash flow was just FCF0 = $1.32.Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter.The WACC for this company 9.00%.Decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding.What is the best estimate of the stock's current intrinsic price?

Accepted Answer

A)  $31.59 
B)  $32.65 
C)  $33.75 
D)  $34.87 
E)  $35.99

Question 9

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 10

Based on the free cash flow 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?

Accepted Answer

A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80

Question 11

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?

Accepted Answer

A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99

Exam 7: Corporate Valuation and Stock Valuation

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.

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF₀ in millions?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

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?