Question 1

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

$4.6B/113.2M = $40.636 FCFE per share; 40.636 × 1.05 = 42.6678; 42.6678/(.116 .05) = 646.48.

Question 2

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 stock should be worth _______ today.

Accepted Answer

Calculations are shown below. P₃ = 0.85 (.98)/[.08 (-.02)] = $8.33; PV of P3 = $8.33/(1.08)³ = $6.6126; P₀ = $6.61226 + $2.3723 = $8.98.

Question 3

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

Calculations are shown below.

Question 4

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. What should the stock sell for today?

Accepted Answer

Calculations are shown below.

Question 5

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

Calculations are shown in the table below. P₃ = $2.54 (1.08)/(.11 .08) = $91.44; PV of P₃ = $91.44/(1.11)³ = $66.8601; P₀ = $4.94 + $66.86 = $71.80.

Question 6

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

Accepted Answer

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

Question 7

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

$3.2M/3.2M = $1.00 FCFE per share; 1.00 × 1.085 = 1.085; 1.085/(.13 .085) = 24.11.

Question 8

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

$1.6M/3.2M = $0.50 FCFE per share; .50 × 1.09 = .545; .545/(.12 .09) = 18.17.

Question 9

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

$4.5M/2.25M = $2.00 FCFE per share; 2.00 × 1.08 = 2.16; 2.16/(.10 .08) = 108.

Question 10

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

Accepted Answer

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

Question 11

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. What should the stock sell for today?

Accepted Answer

Calculations are shown below. P₅ = 3.7164/(.11 .03) = $46.4544; PV of P₅ = $46.4544/(1.11)⁵ = $27.5684; P₀ = $12.1449 + $27.57 = $39.71.

Question 12

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. What should the stock sell for today?

Accepted Answer

Calculations are shown below. P₅ = 3.28 (1.03)/(.13 .03) = $33.80; PV of P₅ = $33.80/(1.13)⁵ = $18.35; P₀ = $18.35 + $9.39 = $27.74.

Question 13

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

$6.1M/2.32M = $2.6293 FCFE per share; 2.6293 × 1.065 = 2.800; 2.80/(.106 .065) = 68.30.

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

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 stock should be worth _______ today.

Accepted Answer

Calculations are shown in the table below. P₃ = 2 (1.10)/(.14 .10) = $55.00; PV of P₃ = $55/(1.14)³ = $37.12; P₀ = $3.56 + $37.12 = $40.68.

Question 17

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

Projected free cash flow = $250,000; V₀ = 250,000/(.13 .07) = $4,166,666.67.

Question 18

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 stock should be worth __________ today.

Accepted Answer

Calculations are shown below. P₃ = 1.00 (.99)/[.10 (-.01)] = $9.00; PV of P₃ = $9/(1.10)³ = $6.7618; P₀ = $6.7618 + $3.8092 = $10.57.

Question 19

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

$122.1M/12.43M = $9.823 FCFE per share; 9.823 × 1.07 = 10.51; 10.51/(.113 .07) = 244.43.

Question 20

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

$246M/123M = $2.00 FCFE per share; 2.00 × 1.08 = 2.16; 2.16/(.10 .08) = 108.

Quiz 18: Equity Valuation Models