Question 1

A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Accepted Answer

A)   $23.11 million
B)   $23.70 million
C)   $24.31 million
D)   $24.93 million
E)   $25.57 millionF) A) and B)
G) A) and E)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   Two firms with the same expected free cash flows and growth rates must also have the same value of operations.
B)   It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.
C)   If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
D)   The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
E)   The constant growth model takes into consideration the capital gains investors expect to earn on a stock.F) A) and B)
G) B) and E)

Question 3

Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?

Accepted Answer

A)   $17.28
B)   $17.70
C)   $18.13
D)   $18.57
E)   $19.01F) None of the above
G) C) and D)

Question 4

Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE) . She asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share. Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis: Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?
s, and she provided you with the following template for use in the analysis: Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?   A)  11.84% B)  12.21% C)  12.58% D)  12.97% E)  13.36%" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)   11.84%
B)   12.21%
C)   12.58%
D)   12.97%
E)   13.36%F) C) and E)
G) B) and D)

Question 5

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)   The company's stock's dividend yield is 5%.
B)   The value of operations is expected to decline in the future.
C)   The company's WACC must be equal to or less than 5%.
D)   The company's value of operations one year from now is expected to be 5% above the current price.
E)   The expected return on the company's stock is 5% a year.F) A) and D)
G) C) and D)

Question 6

If D0 = $2.25, g (which is constant)  = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.42%
B)   4.66%
C)   4.89%
D)   5.13%
E)   5.39%F) A) and D)
G) B) and D)

Question 7

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Accepted Answer

A)   Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
B)   A stock's dividend yield can never exceed its expected growth rate.
C)   A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
D)   Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
E)   The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.F) None of the above
G) B) and C)

Question 8

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Accepted Answer

A)   $23.11
B)   $23.70
C)   $24.31
D)   $24.93
E)   $25.57F) B) and D)
G) A) and E)

Question 9

Alcott'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?

Accepted Answer

A)   8.03%
B)   8.24%
C)   8.45%
D)   8.67%
E)   8.89%F) All of the above
G) C) and D)

Question 10

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

A) True 
 B)False

Question 11

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 12

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0)  was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

Accepted Answer

A)   $948
B)   $998
C)   $1,050
D)   $1,103
E)   $1,158F) A) and B)
G) A) and C)

Question 13

According to the basic FCF 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.

Accepted Answer

A) True 
 B)False

Question 14

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal)  rate of return?

Accepted Answer

A)   6.62%
B)   6.82%
C)   7.03%
D)   7.25%
E)   7.47%F) A) and C)
G) B) and E)

Question 15

Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Accepted Answer

A)   $840
B)   $882
C)   $926
D)   $972
E)   $1,021F) B) and C)
G) B) and E)

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
B)   The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g) , can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate.
C)   The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
D)   The constant growth model cannot be used for a zero growth stock, where free cash flows are 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.F) A) and D)
G) C) and D)

Question 17

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Accepted Answer

A)   $104.27
B)   $106.95
C)   $109.69
D)   $112.50
E)   $115.38F) None of the above
G) B) and E)

Question 18

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)   $1.40F) C) and E)
G) B) and E)

Question 19

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)   $45.99F) A) and B)
G) All of the above

Question 20

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?

Accepted Answer

A)   Stock A has a higher dividend yield than Stock B.
B)   Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
C)   Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's.
D)   The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.
E)   Stock A's expected dividend at t = 1 is only half that of Stock B.F) All of the above
G) A) and E)

Exam 7: Stocks, Stock Valuation, and Stock Market Equilibrium

Which of the following statements is CORRECT?

Correct Answer
verified

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Correct Answer
verified

Correct Answer
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Alcott'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?

Correct Answer
verified

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Correct Answer
verified

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct Answer
verified

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Correct Answer
verified

If D₀ = $2.25, g (which is constant) = 3.5%, and P₀ = $50, what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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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?

Correct Answer
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A stock just paid a dividend of D₀ = $1.50. The required rate of return is r_s = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Correct Answer
verified

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Correct Answer
verified

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?

Correct Answer
verified

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

Correct Answer
verified

Correct Answer
verified

A company's free cash flow was just FCF₀ = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Correct Answer
verified

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Correct Answer
verified

According to the basic FCF 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.

Correct Answer
verified

Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Correct Answer
verified

Exam 7: Stocks, Stock Valuation, and Stock Market Equilibrium

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Alcott'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?

Correct AnswerverifiedShow Answer

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Correct AnswerverifiedShow Answer

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct AnswerverifiedShow Answer

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Correct AnswerverifiedShow Answer

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Correct AnswerverifiedShow Answer

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Correct AnswerverifiedShow Answer

According to the basic FCF 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.

Correct AnswerverifiedShow Answer

Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

If D₀ = $2.25, g (which is constant) = 3.5%, and P₀ = $50, what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A stock just paid a dividend of D₀ = $1.50. The required rate of return is r_s = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

Correct Answer
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A company's free cash flow was just FCF₀ = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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