Question 1

Which of the following statements is FALSE?

Accepted Answer

B)FCF is cash generated by the firm before payments to debt and equity holders.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A)FCF is available to pay both debt and equity holders.

Question 3

Use the following information to answer the question(s)below.
Taggart Transcontinental pays no dividends,but spent $4 billion on share repurchases last year.Taggart's equity cost of capital is 13% and the amount spent on repurchases is expected to grow by 5% per year.Taggart currently has 2 billion shares outstanding.
-Taggart's stock price is closest to:

Accepted Answer

D)Market Capitalization = 11ea7cce_3ba4_e1bf_928c_8d4261895cfc_TB1626_11 = $50 billion/2 billion shares = $25.00 per share

Question 4

Which of the following statements is FALSE?

Accepted Answer

D)You would use the firm's weighted average cost of capital.

Question 5

Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.IF Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Accepted Answer

C)P₀ = 11ea7cce_3ba2_bece_928c_67311519a1ab_TB1626_11 + 11ea7cce_3ba2_becf_928c_83e08252c135_TB1626_11 = $6.25

Question 6

Use the following information to answer the question(s)below.
Taggart Transcontinental pays no dividends,but spent $4 billion on share repurchases last year.Taggart's equity cost of capital is 13% and the amount spent on repurchases is expected to grow by 5% per year.Taggart currently has 2 billion shares outstanding.
-Taggart's market capitalization is closest to:

Accepted Answer

D)Market Capitalization = 11ea7cce_3ba4_baae_928c_4befbfc3d14b_TB1626_11 = $50 billion

Question 7

Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years:  Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-The enterprise value of CCM corporation is closest to:

Accepted Answer

A)V₀ = 11ea7cce_3ba6_1a47_928c_854d1d44b9ef_TB1626_11 + 11ea7cce_3ba6_1a48_928c_d92f0e36ca4d_TB1626_11 + ...+ 11ea7cce_3ba6_4159_928c_9b819dda36cc_TB1626_11 + 11ea7cce_3ba6_415a_928c_713e64cfb620_TB1626_11 V₀ = 11ea7cce_3ba6_415b_928c_b58c645f6603_TB1626_11 + 11ea7cce_3ba6_686c_928c_7736ec77cc10_TB1626_11 + 11ea7cce_3ba6_686d_928c_c3f2deb9621f_TB1626_11 + 11ea7cce_3ba6_686e_928c_63e7b16ed787_TB1626_11 + 11ea7cce_3ba6_8f7f_928c_1d12d85c5911_TB1626_11 = 395.58 million

Question 8

Taggart Transcontinental has a divided yield of 2.5%.Taggart's equity cost of capital is 10%,and its dividends are expected to grow at a constant rate.Based on this information,Taggart's constant growth rate in dividends is closest to:

Accepted Answer

D)P₀ = 11ea7cce_3ba2_70ac_928c_e97f8f204d9e_TB1626_11 → r_e - g₌ 11ea7cce_3ba2_97bd_928c_7d94826b4fc6_TB1626_11 = .10 - g = .025 = g = .075 or 7.5%

Question 9

Which of the following statements is FALSE?

Accepted Answer

B)The discounted free cash flow model is used to find the value of the firm.

Question 10

Which of the following statements is FALSE?

Accepted Answer

C)If the firm has no debt then r_wacc= the cost of equity.

Question 11

Use the following information to answer the question(s)below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share)and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-Wyatt's current stock price is closest to:

Accepted Answer

C)Retention ratio_{Year 1}= 11ea7cce_3ba5_56f2_928c_915ce43c7baa_TB1626_11 = .75 × 16% return = 12% growth rate EPS_{Year 1}= $4.00 (1.12)= $4.48 Retention ratio_{Year 2}= 11ea7cce_3ba5_7e03_928c_ad5514d0802e_TB1626_11 = .776786 × 16% return = 12.4286% growth rate EPS_{Year 2}= $4.48 (1.124286)= $5.0368 Retention ratio_{Year 3}= .40% × 16% return = 6.4% growth rate P₀= 11ea7cce_3ba5_7e04_928c_f1cf992c6fa4_TB1626_11 + 11ea7cce_3ba5_7e05_928c_398774bcc9f5_TB1626_11 = $49.11

Question 12

Rearden Metals expects to have earnings this coming year of $2.50 per share.Rearden plans to retain all of its earnings for the next year.For the subsequent three years,the firm will retain 50% of its earnings.It will ten retain 25% of its earnings from that point onward.Each year,retained earnings will be invested in new projects with an expected return of 20% per year.Any earnings that are not retained will be paid out as dividends.Assume Rearden's shares outstanding remains constant and all earnings growth comes from the investment of retained earnings.If Rearden's equity cost of capital is 10%,then Rearden's stock price is closest to:

Accepted Answer

B) 11ea7cce_3ba3_3402_928c_033440c6b783_TB1626_00 growth_{year 5}= 11ea7cce_3ba3_3403_928c_ede9e24ce603_TB1626_11 = .050125 or 5% P⁰ = 11ea7cce_3ba3_5b14_928c_792698824253_TB1626_11 + 11ea7cce_3ba3_5b15_928c_01278b71bb54_TB1626_11 + 11ea7cce_3ba3_8226_928c_89768fe41eb0_TB1626_11 + 11ea7cce_3ba3_8227_928c_fbab4c608840_TB1626_11 = 44.57

Question 13

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the:

Accepted Answer

The total payout model is the most appropriate choice as it takes into account both the dividends and share repurchases made by the firm. This model values the firm based on the total amount of cash it pays out to shareholders. It assumes that the earnings growth rate will remain consistent and that the firm will continue to pay out cash to shareholders at the same rate as in the past. Other models such as the dividend discount model only take into account the dividends paid out by the firm, while the discounted free cash flow model looks at the cash flows generated by the firm rather than the cash paid out to shareholders.

Question 14

Use the following information to answer the question(s)below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share)and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to have earnings of $500 million this year.Rufus plans to pay out 40% of its earnings in dividends and they expect to use another 20% of their earnings to repurchase shares.If Rufus' equity cost of capital is 15% and Rufus' earnings are expected to grow at a rate of 3% per year,then the value of a share of Rufus stock is closest to:

Accepted Answer

C)Dividends = $500 × .40 = $200 million Repurchases = $500 × .20 = $100 million PV(Future Total Dividends and Repurchases)= ($200 + $100)/(.15 - .03)= $2500 million P₀ = $2500 million/125 million shares = $20 per share

Question 15

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Accepted Answer

The discounted free cash flow model is the simplest model to use when you don't want to explicitly forecast dividends, share repurchases, or the use of debt. It focuses on the cash flows that the firm generates from its operations, which can be used for various purposes including dividends and debt repayment, without needing to specify how those cash flows are distributed.

Question 16

Which of the following statements is FALSE?

Accepted Answer

B)By repurchasing shares,the firm decreases its share count,which increases its earning and dividends on a per-share basis.

Question 17

Which of the following equations is INCORRECT?

Accepted Answer

A)P₀ = 11ea7cce_3ba4_939d_928c_b1ee9e2c2ca4_TB1626_11

Question 18

Kinston Industries just announced that it will cut its dividend from $3.00 to $2.00 per share and use the extra funds to expand its operations.Kinston's dividends were expected to grow at a 2% rate,and its share price was $37.50.With the new expansion,Kinston dividends are expected to grow at a 5% rate.Kinston's share price following this announcement should be:

Accepted Answer

D)Step #1 r_{e =} 11ea7cce_3ba2_e5e0_928c_13131ba0f8e3_TB1626_11 + .02 = .10 Step #2 P_{0 =} 11ea7cce_3ba2_e5e1_928c_d7b77a289717_TB1626_11 = 40.00

Question 19

Use the following information to answer the question(s)below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share)and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-Wyatt's expected EPS in two years is closest to:

Accepted Answer

C)Retention ratio_{Year 1}= 11ea7cce_3ba5_08d0_928c_3f30f3c5e853_TB1626_11 = .75 × 16% return = 12% growth rate EPS_{Year 1}= $4.00 (1.12)= $4.48 Retention ratio_{Year 2}= 11ea7cce_3ba5_2fe1_928c_c5425491d107_TB1626_11 = .776786 × 16% return = 12.4286% growth rate EPS_{Year 2}= $4.48 (1.124286)= $5.0368

Question 20

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the:

Accepted Answer

The dividend discount model is the most appropriate choice for valuing a firm that consistently pays out its earnings as dividends. This model calculates the present value of all future dividends at an appropriate discount rate, providing an estimate of the current value of the firm.

Quiz 9: Valuing Stocks

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.IF Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Taggart Transcontinental has a divided yield of 2.5%.Taggart's equity cost of capital is 10%,and its dividends are expected to grow at a constant rate.Based on this information,Taggart's constant growth rate in dividends is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the:

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the: