Question 1

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The total value of the equity of F&G Manufacturing Company should be

Accepted Answer

The answer of Consider the free cash flow approach to...

Question 2

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

Accepted Answer

The answer of Siri had a FCFE of $1.6M last...

Question 3

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI's required return on equity is 11.3%, and WACC is 9.8%. If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is

Accepted Answer

The answer of SI International had a FCFE of $122.1M...

Question 4

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

Accepted Answer

The intrinsic value of See's shares can be calculated using the Gordon Growth Model for Free Cash Flow to Equity (FCFE), which is given by the formula: $$ \text{Value per share} = \frac{\text{FCFE} \times (1 + g)}{r - g} $$ where $ \text{FCFE} $ is the Free Cash Flow to Equity, $ g $ is the growth rate of FCFE, and $ r $ is the required return on equity. Plugging in the given values: $$ \text{Value per share} = \frac{6.1M \times (1 + 0.065)}{0.106 - 0.065} $$ $$ \text{Value per share} = \frac{6.1M \times 1.065}{0.041} $$ $$ \text{Value per share} = \frac{6.4965M}{0.041} $$ $$ \text{Value per share} = 158.4512M $$ To find the value per share, divide by the number of shares outstanding: $$ \text{Value per share} = \frac{158.4512M}{2.32M} $$ $$ \text{Value per share} = 68.30 $$ Therefore, the intrinsic value of See's shares is $68.30, which corresponds to choice B.

Question 5

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is

Accepted Answer

The answer of Seaman had a FCFE of $4.6B last...

Question 6

Goodie Corporation produces goods that are very mature in their product life cycles. Goodie Corporation is expected to have per share FCFE in year 1 of $2.00, per share FCFE of $1.50 in year 2, and per share FCFE of $1.00 in year 3. After year 3, per share FCFE is expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The first three dividends are worth _______ today.

Accepted Answer

The present value of the first three dividends is $3.81. The present value of the dividend in year 1 is $2.00/(1.10^1) = $1.82. The present value of the dividend in year 2 is $1.50/(1.10^2) = $1.36. The present value of the dividend in year 3 is $1.00/(1.10^3) = $0.87. The total present value of the first three dividends is $1.82 + $1.36 + $0.87 = $3.81.

Question 7

The growth in per share FCFE of FOX, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely. The required rate of return on FOX, Inc. is 13%. Last year's per share FCFE was $1.85. The first three dividends are worth _______ today.

Accepted Answer

The answer of The growth in per share FCFE of...

Question 8

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00. After year 3, per share FCFE is expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The first three dividends are worth _______ today.

Accepted Answer

The answer of Smart Draw Company is expected to have...

Question 9

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is

Accepted Answer

The answer of SGA Consulting had a FCFE of $3.2M...

Question 10

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

Accepted Answer

WACC (Weighted Average Cost of Capital) is used as the discount rate for Free Cash Flow to the Firm (FCFF) valuation models because it reflects the overall cost of capital, including both equity and debt, which is appropriate for valuing the entire firm.

Question 11

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is

Accepted Answer

The intrinsic value of Zero's shares is $108.00. This is calculated using the Gordon Growth Model, which is:Intrinsic Value = FCFE / (r - g)where:FCFE = Free Cash Flow to Equityr = Required return on equityg = Growth rate of FCFEIn this case, FCFE = $4.5M, r = 10%, and g = 8%. Plugging these values into the formula, we get:Intrinsic Value = $4.5M / (0.10 - 0.08) = $108.00

Question 12

Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in year 2 of $1.97, and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

Accepted Answer

The answer of Boaters World is expected to have per...

Question 13

Old Style Corporation produces goods that are very mature in their product life cycles. Old Style Corporation is expected to have per share FCFE in year 1 of $1.00, per share FCFE of $0.90 in year 2, and per share FCFE of $0.85 in year 3. After year 3, per share FCFE is expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The first three dividends are worth _______ today.

Accepted Answer

The answer of Old Style Corporation produces goods that are...

Question 14

The growth in per share FCFE of CBS, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely. The required rate of return on CBS, Inc. is 12%. Last year's per share FCFE was $2.00. The first three dividends are worth _______ today.

Accepted Answer

The answer of The growth in per share FCFE of...

Question 15

The most appropriate discount rate to use when applying a FCFF valuation model is the

Accepted Answer

The Weighted Average Cost of Capital (WACC) is the most appropriate discount rate to use when applying a Free Cash Flow to the Firm (FCFF) valuation model because it reflects the overall cost of capital, including both debt and equity, which aligns with the perspective of the FCFF model that values the entire firm.

Question 16

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

Accepted Answer

The Free Cash Flow to Equity (FCFE) valuation model directly relates to the cash flows available to equity shareholders after accounting for all expenses, reinvestment, and debt payments. Therefore, the required rate of return on equity is the most appropriate discount rate to use for this model, as it reflects the return expectations of equity investors.

Question 17

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

Accepted Answer

The answer of Stingy Corporation is expected have EBIT of...

Question 18

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint's required return on equity is 10%, and WACC is 9%. If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is

Accepted Answer

The intrinsic value of the shares can be calculated using the Gordon Growth Model: P = FCFE * (1 + g) / (r - g). Here, FCFE = $246M, g = 8%, r = 10%. So, P = $246M * 1.08 / (0.10 - 0.08) = $13,284M. Dividing by 123M shares gives $108 per share.

Question 19

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The projected free cash flow of F&G Manufacturing Company for the coming year is

Accepted Answer

The answer of Consider the free cash flow approach to...

Question 20

The growth in per share FCFE of SYNK, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely. The required rate of return on SYNC, Inc. is 11%. Last year's per share FCFE was $2.75. The first three dividends are worth _______ today.

Accepted Answer

The first three dividends are worth $12.14 today because the present value of the first dividend is $2.75 / (1 + 0.11) = $2.48, the present value of the second dividend is $2.48 * (1 + 0.08) / (1 + 0.11) = $2.68, and the present value of the third dividend is $2.68 * (1 + 0.08) / (1 + 0.11) = $2.90.

Quiz 18: Equity Valuation Models

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI's required return on equity is 11.3%, and WACC is 9.8%. If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is

The most appropriate discount rate to use when applying a FCFF valuation model is the

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint's required return on equity is 10%, and WACC is 9%. If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is