Filters
Question type
Study Flashcards

Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions?


A) $1,456
B) $1,529
C) $1,606
D) $1,686
E) $1,770

F) A) and E)
G) D) and E)

Correct Answer

verifed

verified

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

A) True
B) False

Correct Answer

verifed

verified

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

A) True
B) False

Correct Answer

verifed

verified

Nachman Industries 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?


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

F) A) and B)
G) None of the above

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
B) To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital.
C) To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
D) To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
E) The corporate valuation model requires the assumption of a constant growth rate in all years.

F) None of the above
G) All of the above

Correct Answer

verifed

verified

Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5?


A) $1,025
B) $1,079
C) $1,136
D) $1,196
E) $1,259

F) B) and E)
G) D) and E)

Correct Answer

verifed

verified

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?


A) $40.17
B) $41.20
C) $42.26
D) $43.34
E) $44.46

F) None of the above
G) A) and B)

Correct Answer

verifed

verified

The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?


A) $28.90
B) $29.62
C) $30.36
D) $31.12
E) $31.90

F) C) and D)
G) A) and C)

Correct Answer

verifed

verified

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?


A) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
B) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
C) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
D) The stocks must sell for the same price.
E) Stock Y must have a higher dividend yield than Stock X.
Multiple Choice: Problems
Most of these problems are straightforward and only moderately difficult. However, a few of the later ones are relatively difficult and should be used primarily on take-home exams for students with some experience with Excel. Problems with * in the topic line are nonalgorithmic.

F) B) and D)
G) A) and B)

Correct Answer

verifed

verified

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

A) True
B) False

Correct Answer

verifed

verified

The corporate valuation model cannot be used unless a company pays dividends.

A) True
B) False

Correct Answer

verifed

verified

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

A) True
B) False

Correct Answer

verifed

verified

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?


A) The two stocks must have the same dividend per share.
B) If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C) If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D) The two stocks must have the same dividend growth rate.
E) The two stocks must have the same dividend yield.

F) A) and B)
G) D) and E)

Correct Answer

verifed

verified

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?


A) $14.52
B) $14.89
C) $15.26
D) $15.64
E) $16.03

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?


A) 8.03%
B) 8.24%
C) 8.45%
D) 8.67%
E) 8.89%

F) C) and D)
G) A) and C)

Correct Answer

verifed

verified

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?


A) Stock X has a higher dividend yield than Stock Y.
B) Stock Y has a higher dividend yield than Stock X.
C) One year from now, Stock X's price is expected to be higher than Stock Y's price.
D) Stock X has the higher expected year-end dividend.
E) Stock Y has a higher capital gains yield.

F) A) and B)
G) B) and E)

Correct Answer

verifed

verified

Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?


A) $37.05
B) $38.16
C) $39.30
D) $40.48
E) $41.70

F) B) and E)
G) None of the above

Correct Answer

verifed

verified

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?


A) $2.20
B) $2.44
C) $2.69
D) $2.96
E) $3.25

F) A) and E)
G) None of the above

Correct Answer

verifed

verified

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.

A) True
B) False

Correct Answer

verifed

verified

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

A) True
B) False

Correct Answer

verifed

verified

Showing 21 - 40 of 83

Related Exams

Exam 1

Overview

66 Questions

Exam 2

Financial Markets

34 Questions

Exam 3

Financial Statements

130 Questions

Exam 4

Statement Analysis

127 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Interest Rates

82 Questions

Exam 7

Bonds

91 Questions

Exam 8

Risk and Return

146 Questions

Exam 10

Cost of Capital

94 Questions

Exam 11

Capital Budgeting

107 Questions

Exam 12

Cash Flow and Risk

73 Questions

Exam 13

Capital Structure

88 Questions

Exam 14

Dividends

76 Questions

Exam 15

Working Capital

127 Questions

Exam 16

Forecasting

39 Questions

Exam 17

Multinational

50 Questions

Exam 18

Stock Equilibrium and Project Evaluation

8 Questions

Show Answer