Question 1

Based on the corporate valuation model,Wang Inc.'s total corporate value is $750 million.Its balance sheet shows $100 million notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital),and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?

Accepted Answer

The answer of Based on the corporate valuation model,Wang Inc.'s...

Question 2

You have been assigned the task of using the corporate,or free cash flow,model to estimate Petry Corporation's intrinsic value.The firm's WACC is 10.00%,its end-of-year free cash flow (FCF₁)is expected to be $70.0 million,the FCFs are expected to grow at a constant rate of 5.00% a year in the future,the company has $200 million of long-term debt and preferred stock,and it has 30 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

The answer of You have been assigned the task of...

Question 3

Kale Inc.forecasts the free cash flows (in millions)shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?  ​

Accepted Answer

The answer of Kale Inc.forecasts the free cash flows (in...

Question 4

Sorenson Corp.'s expected year-end dividend is D₁ = $4.00,its required return is r_S = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e. ,what is ?

Accepted Answer

The answer of Sorenson Corp.'s expected year-end dividend is D₁...

Question 5

The Francis Company is expected to pay a dividend of D₁ = $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future.The company's beta is 1.70,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is the company's current stock price?

Accepted Answer

Using the constant growth valuation model, we have:
P0 = D1 / (rs - g)
where:
D1 = expected dividend next year = $1.25 * (1 + 6.00%) = $1.325
rs = required return on equity = rf + beta * market risk premium
     = 4.00% + 1.70 * 5.50% = 13.45%
g = expected growth rate = 6.00%
Therefore:
P0 = $1.325 / (13.45% - 6.00%) = $17.01
Thus, the current stock price is $17.01. Option C is the correct answer.

Question 6

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $29.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Accepted Answer

The answer of Goode Inc.'s stock has a required rate...

Question 7

Based on the corporate valuation model,Morgan Inc.'s total corporate value is $200 million.The balance sheet shows $90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.The company has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?

Accepted Answer

The answer of Based on the corporate valuation model,Morgan Inc.'s...

Question 8

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Accepted Answer

The answer of Francis Inc.'s stock has a required rate...

Question 9

Ryan Enterprises forecasts the free cash flows (in millions)shown below.The weighted average cost of capital is 13.0%,and the FCFs are expected to continue growing at a 5.0% rate after Year 3.What is the firm's total corporate value,in millions?  ​

Accepted Answer

The answer of Ryan Enterprises forecasts the free cash flows...

Question 10

Gupta Corporation is undergoing a restructuring,and its free cash flows are expected to vary considerably during the next few years.However,the FCF is expected to be $85.00 million in Year 5,and the FCF growth rate is expected to be a constant 6.5% beyond that point.The weighted average cost of capital is 12.0%.What is the horizon (or continuing)value (in millions)at t = 5?

Accepted Answer

The answer of Gupta Corporation is undergoing a restructuring,and its...

Question 11

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.90,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P₀?

Accepted Answer

The answer of The Isberg Company just paid a dividend...

Question 12

Based on the corporate valuation model,Gray Entertainment's total corporate value is $1,150 million.The company's balance sheet shows $120 million of notes payable,$300 million of long-term debt,$50 million of preferred stock,$180 million of retained earnings,and $800 million of total common equity.If the company has 30 million shares of stock outstanding,what is the best estimate of its price per share?

Accepted Answer

Total liabilities and equity = $1,150 million
Notes payable = $120 million
Long-term debt = $300 million
Preferred stock = $50 million
Retained earnings = $180 million
Total common equity = $800 million

Therefore, total liabilities and preferred stock = $470 million ($120M + $300M + $50M)
Total common equity = $680 million ($800M - $120M)

Using the corporate valuation model:
Total corporate value = Earnings before interest and taxes (EBIT) x (1 - tax rate) + Depreciation and amortization - Capital expenditures - Increase in net working capital + Non-operating assets
$1,150 million = EBIT x (1 - 0.35) + Depreciation and amortization - Capital expenditures - Increase in net working capital + Non-operating assets

Assuming that non-operating assets are 0, we can rearrange the equation to solve for EBIT:
EBIT = ($1,150 million - Depreciation and amortization + Capital expenditures + Increase in net working capital) / (1 - 0.35)
EBIT = ($1,150 million - $0 + $0 + $0) / 0.65
EBIT = $1,769.23 million

Next, we need to calculate the net income available to common shareholders:
EBIT - Interest expense = EBT
EBT x (1 - tax rate) = Net income available to common shareholders
$1,769.23 million - Interest expense = EBT
EBT = $1,469.23 million
Net income available to common shareholders = $1,469.23 million x (1 - 0.35) = $955.00 million

Finally, we can calculate the price per share:
Price per share = (Total common equity - Preferred stock) / Number of shares outstanding
Price per share = ($800 million - $50 million) / 30 million
Price per share = $25.83

Therefore, the closest estimate is option C: $22.67.

Question 13

Rebello'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

The answer of Rebello's preferred stock pays a dividend of...

Question 14

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $500 million.Its balance sheet shows $110 million in notes payable,$90 million in long-term debt,$20 million in preferred stock,$140 million in retained earnings,and $280 million in total common equity.If the company has 25 million shares of stock outstanding,what is the best estimate of its stock price per share?

Accepted Answer

The answer of Based on the corporate valuation model,the total...

Question 15

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Accepted Answer

The price of a perpetual preferred stock is calculated by dividing the annual dividend by the required return. Here, $2.00 / 0.065 = $30.77.

Question 16

You must estimate the intrinsic value of Noe Technologies' stock.The end-of-year free cash flow (FCF₁)is expected to be $24.50 million,and it is expected to grow at a constant rate of 7.0% a year thereafter.The company's WACC is 10.0%,it has $125.0 million of long-term debt plus preferred stock outstanding,and there are 15.0 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

1. Calculate the terminal value (TV) using the Gordon Growth Model:

TV = FCF / (WACC - g)

g = 7.0%
WACC = 10.0%

TV = $24.50 million / (10.0% - 7.0%) = $816.67 million

2. Calculate the present value (PV) of the FCFs and the TV:

PV = FCF1 / (1 + WACC)^1 + FCF2 / (1 + WACC)^2 + ... + FCFn / (1 + WACC)^n + TV / (1 + WACC)^n

n = 1 (since we have one year of FCFs and a perpetual growth rate thereafter)
FCF1 = $24.50 million
n = 1
TV = $816.67 million

PV = $24.50 million / (1 + 10.0%)^1 + $816.67 million / (1 + 10.0%)^1
PV = $22.27 million + $742.43 million = $764.70 million

3. Calculate the intrinsic value per share:

Intrinsic Value = (PV - Total Debt and Preferred Stock) / Number of Shares Outstanding
Total Debt and Preferred Stock = $125.0 million

Intrinsic Value = ($764.70 million - $125.0 million) / 15.0 million shares
Intrinsic Value = $39.98 per share, which is closest to option B ($46.11 per share).

Question 17

Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC)is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Accepted Answer

The horizon value at t = 3 can be calculated using the formula for the terminal value of a growing perpetuity: Horizon Value = FCF * (1 + g) / (WACC - g). Substituting the given values: Horizon Value = $55 million * (1 + 0.055) / (0.10 - 0.055) = $1,289 million.

Question 18

Schnusenberg Corporation just paid a dividend of D₀ = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.70,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price?

Accepted Answer

The answer of Schnusenberg Corporation just paid a dividend of...

Question 19

Carter's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $57.50,what is its nominal (not effective)annual rate of return?

Accepted Answer

The answer of Carter's preferred stock pays a dividend of...

Question 20

Kedia Inc.forecasts a negative free cash flow for the coming year,FCF₁ = -$10 million,but it expects positive numbers thereafter,with FCF₂ = $34 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14.0%,what is the firm's total corporate value,in millions?

Accepted Answer

The answer of Kedia Inc.forecasts a negative free cash flow...

Quiz 9: Stocks and Their Valuation

Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?

Sorenson Corp.'s expected year-end dividend is D₁ = $4.00,its required return is r_S = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e. ,what is ?

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $29.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Ryan Enterprises forecasts the free cash flows (in millions) shown below.The weighted average cost of capital is 13.0%,and the FCFs are expected to continue growing at a 5.0% rate after Year 3.What is the firm's total corporate value,in millions?

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.90,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P₀?

Rebello'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?

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Carter's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $57.50,what is its nominal (not effective) annual rate of return?

Quiz 9: Stocks and Their Valuation

Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions? ​

Sorenson Corp.'s expected year-end dividend is D1 = $4.00,its required return is rS = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e. ,what is ?

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $29.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Ryan Enterprises forecasts the free cash flows (in millions) shown below.The weighted average cost of capital is 13.0%,and the FCFs are expected to continue growing at a 5.0% rate after Year 3.What is the firm's total corporate value,in millions? ​

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.90,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P0?

Rebello'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?

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Carter's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $57.50,what is its nominal (not effective) annual rate of return?

Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?

Sorenson Corp.'s expected year-end dividend is D₁ = $4.00,its required return is r_S = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e. ,what is ?

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $29.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Ryan Enterprises forecasts the free cash flows (in millions) shown below.The weighted average cost of capital is 13.0%,and the FCFs are expected to continue growing at a 5.0% rate after Year 3.What is the firm's total corporate value,in millions?

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.90,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P₀?