Deck 23: Corporate Valuation, Value-Based Management, and Corporate Governance

Question 1

Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

A) $840
B) $882
C) $926
D) $972

Answer 1

A

Question 2

Which action does NOT always increase a company's market value?

A) increasing the expected growth rate of sales
B) increasing the expected operating profitability (nopat/sales)
C) decreasing the capital requirements (capital/sales)
D) decreasing the weighted average cost of capital

Answer 2

A

Question 3

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Answer 3

True

Question 4

Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 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%, what is the firm's value of operations, in millions?

A) $158
B) $167
C) $175
D) $184

Question 5

The CEO of BMI Industries has been granted some stock options that have provisions similar to most other executive stock options. If BMI's stock underperforms the market, these options will necessarily be worthless.

Question 6

If a company's expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA).

Question 7

Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate.

Question 8

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Question 9

Which action can be an adverse move for corporate governance?

A) making the CEO the chairman of the board
B) decreasing the board size
C) increasing the seats of independent directors in the board up to 80%
D) paying board members with stock rather than salary

Question 10

Suppose Yon Sun Corporation's free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?

A) $948
B) $998
C) $1,050
D) $1,103

Question 11

A poison pill is also known as a corporate restructuring.

Question 12

Which of the following will NOT be regarded as being a barrier to hostile takeovers?

A) targeted share repurchases
B) shareholder rights provisions
C) restricted voting rights
D) cumulative voting

Question 13

Two most important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.

Question 14

Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

A) $1,714,750
B) $1,805,000
C) $1,900,000
D) $2,000,000

Question 15

Based on the corporate valuation model, the value of a company's operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $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 the stock's price per share?

A) $23.00
B) $25.56
C) $28.40
D) $31.24

Question 16

Based on the corporate valuation model, Bernile Inc.'s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of 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?

A) $450
B) $475
C) $500
D) $525

Question 17

Based on the corporate valuation model, the value of a company's operations is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

A) $24.90
B) $27.67
C) $30.43
D) $33.48

Question 18

Which statement regarding the corporate valuation model is NOT correct?

A) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
B) The corporate valuation model discounts free cash flows by the required return on equity.
C) The corporate valuation model can be used to find the value of a division.
D) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.

Question 19

Leverage has unclear impact on corporate value as debt can reduce one aspect of agency costs (wasteful spending), but it may increase another (underinvestment).

Question 20

Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

A) $757
B) $797
C) $839
D) $883

Question 21

Based on the corporate valuation model, Hunsader's value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $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?

A) $13.72
B) $14.44
C) $15.20
D) $16.00