Question 1

Bavarian Sausage free cash flow for the current year is $6,750,000 and investors believe that the company's free cash flow will grow by 5% annually forever.If Bavarian sausage's weighted average cost of capital is 15%,what is their enterprise value?

Accepted Answer

6750000(1.05)/(.15-.05)= 85350000

Question 2

Smith Construction,Inc.is expected to pay a $2.78 dividend next year.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

Accepted Answer

D1 = 2.78
D2 = 2.78(1.04)= 2.89
D3 = 2.89(1.04)= 3.01
D4 = 3.01(1.04)= 3.13
P = 2.78/1.1 + 2.89/1.1^2 + 3.01/1.1^3 + 3.13/1.1^4 = 9.31

Question 3

Miller Juice,Inc.just paid a $3 dividend.The company is expected to pay a $3.50 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

Accepted Answer

P2 = 4(1.05)/(.12-.05)= 60
P = 3.5/1.12 + (4+60)/1.12^2 = 54.15

Question 4

Bavarian Sausage,Inc.has preferred stock outstanding.This stock pays a semiannual dividend of $1.25.If the next dividend is paid six months from now and the annual required return is 10%,what should be the value of the preferred stock?

Accepted Answer

1.25/(.10/2)= 25

Question 5

Miller Juice,Inc.is not paying a dividend right now,but is expected to pay a $4.56 dividend two years from now.Investors expect that dividend to grow by 4% every year forever.If the required return on the stock investment is 14%,what should be the price of Miller Juice stock today?

Accepted Answer

P2 = 4.56(1.04)/(.14-.04)= 47.42
P = (4.56+47.42)/1.14^2 = 36.49

Question 6

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the company does not have any preferred stock outstanding.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

Accepted Answer

(75000000-23000000)/3500000 = 14.86

Question 7

The first public sale of company stock to outside investors is called a/an

Accepted Answer

The first public sale of company stock to outside investors is called an initial public offering (IPO). A seasoned equity offering is a subsequent sale of stock by a company that has already gone public. Shareholders' meeting and proxy fight are not related to the first public sale of company stock to outside investors.

Question 8

Which of the following stock exchanges has the most strict listing requirements?

Accepted Answer

The New York Stock Exchange (NYSE) has traditionally been considered the most prestigious stock exchange in the US and has the most strict listing requirements. Companies must meet minimum standards for shares outstanding, market value, and earnings, among other factors, and must also adhere to NYSE's corporate governance requirements. This exclusivity has been a key factor in the NYSE's reputation as the top choice for large, established companies.

Question 9

Smith Construction,Inc.just paid a $2.78 dividend.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

Accepted Answer

D1 = 2.78(1.04)= 2.89
D2 = 2.89(1.04)= 3.01
D3 = 3.01(1.04)= 3.13
P = 2.89/1.1 + 3.01/1.1^2 + 3.13^3 = 7.46

Question 10

What is the market capitalization of a company?

Accepted Answer

Market capitalization is the market value of all outstanding shares of a company. It is calculated by multiplying the current stock price by the total number of outstanding shares. It gives an idea of the company's size in the market and is often used as a measure to compare companies in the same industry.

Question 11

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the market value of its preferred stock is $5,000,000.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

Accepted Answer

(75000000-23000000-5000000)/3500000 = 13.43

Question 12

Which statement about common shareholders is incorrect?

Accepted Answer

Shareholders actually have the lowest precedence when it comes to claims on a company's assets in the event of bankruptcy. Bondholders, creditors, and other claimholders typically have priority over common shareholders.

Question 13

Miller Juice traditionally retains 65% of its earnings for future investments.Last year Miller's return on equity was 15%.What is Miller's growth rate?

Accepted Answer

.15(.65)= .0975

Question 14

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

Accepted Answer

1.57/(.14-.05)= 17.44

Question 15

Miller Juice traditionally pays out 35% of its earnings as dividends.Last year Miller's earnings available for common stockholders were $256 million and the book value of its equity was $678 million.What is Miller's growth rate?

Accepted Answer

(256/678)(1-.35)= .2454

Question 16

Which of the following is not a difficulty associated with valuing common stock?

Accepted Answer

All three options (A, B, and C) are difficulties associated with valuing common stock. Thus, option D is not a correct statement.

Question 17

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

Accepted Answer

1.57(1.05)/(.14-.05)= 18.32

Question 18

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

Accepted Answer

D5 = 1.57^5 = 2.00
P5 = 2.00(1.05)/(.14-.05)= 23.33

Question 19

Miller Juice,Inc.is expected to pay a $3.00 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

Accepted Answer

P2 = 4(1.05)/(.12-.05)= 60
P = 3/1.12 + (60+4)/1.12^2 = 53.70

Question 20

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

Accepted Answer

D5 = 1.57(1.05)^4 = 1.91
P5 = 1.91(1.05)/(.14-.05)= 22.28

Quiz 5: Valuing Stocks