Question 1

A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%.What is the current value of operations?

Accepted Answer

E

Question 2

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

The value of operations one year from now being expected to be 5% above the current price directly correlates with the assumption of constant growth in free cash flows at a rate of 5% a year. This growth implies that the company's operations are expanding, thereby increasing its value over time.

Question 3

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

This statement is true as the cash flows associated with common stock are inherently more uncertain and variable compared to the fixed and predetermined cash flows of bonds. Stockholders are entitled to a share of the company's profits as and when they are declared by the board of directors, whereas bondholders receive periodic fixed interest payments and repayment of principal at maturity according to the terms of the bond agreement. Therefore, the estimation of future cash flows for common stock requires more assumptions and a certain degree of uncertainty, making it more challenging to value stocks compared to bonds.

Question 4

The preemptive right is important to shareholders because it

Accepted Answer

The preemptive right is a corporate right that gives current shareholders the right to purchase additional shares of a company's stock before it is offered to the public. This protects the current shareholders from having their ownership interests diluted by the issuance of new shares to the public. Therefore, it is important to shareholders because it maintains their percentage of ownership in the company.

Question 5

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Accepted Answer

Founders' shares typically have more voting power than other classes of common stock.

Question 6

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

The basic Free Cash Flow (FCF) stock valuation model determines the value of a stock based on the present value of the company's expected future cash flows, independent of the investor's holding period.

Question 7

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

This statement accurately describes the purpose and use of classified stock.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. Choice A is incorrect because the right to approve or disapprove of a merger is typically granted to the board of directors or a majority of stockholders. Choice C is incorrect because the free cash flow valuation model can be used for firms with negative growth rates, but the resulting value may be negative. Choice D is incorrect because the free cash flow valuation model can be used for firms with growth rates that are either higher or lower than the WACC. Choice E is incorrect because some state charters may allow for different voting rights for different classes of common stock.

Question 9

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF₀ in millions?

Accepted Answer

The answer of Justus Motor Co.has a WACC of 11.50%,...

Question 10

The projected cash flow for the next year for Minesuah Inc.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?

Accepted Answer

The answer of The projected cash flow for the next...

Question 11

Which of the following statements is NOT CORRECT?

Accepted Answer

The free cash flow valuation model discounts free cash flows by the weighted average cost of capital (WACC), not the required return on equity. The required return on equity is used for the dividend discount model.

Question 12

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

Some class or classes of common stock are entitled to more votes per share than other classes. This is known as dual-class structure, where certain classes of common stock may have more voting rights than other classes. It allows certain shareholders, such as founders or insiders, to maintain control over the company even with a smaller percentage of ownership. Not all companies have multiple classes of common stock, and not all common stock pays the same dividend or has the same voting rights. The statement in (A) and (C) is incorrect, and there is no universal classification of common stock as stated in (E).

Question 13

Lance Inc.'s free cash flow was just $1.00 million.If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?

Accepted Answer

The answer of Lance Inc.'s free cash flow was just...

Question 14

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

The preemptive right indeed gives current stockholders the right to purchase any new shares issued by the firm on a pro rata basis, which helps protect their control and value in the company.

Question 15

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

The statement is incorrect. The preemptive right allows existing stockholders to maintain their proportionate ownership in the company by allowing them to purchase new shares before they are offered to the general public. It does not give stockholders the right to call for a meeting to vote to replace management. That would require a different type of right, such as the right to call a special meeting or the right to act by written consent.

Question 16

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

Accepted Answer

This is the widely accepted approach for discounted cash flow (DCF) analysis. The weighted average cost of capital (WACC) represents the minimum rate of return that investors require from the firm to compensate for the risk of investing in its assets. By discounting the expected cash flows at this rate, we can calculate the present value of the firm's expected future cash flows, which reflects the intrinsic value of its operations.

Question 17

The free cash flow valuation model cannot be used unless a company doesn't pay dividends.

Accepted Answer

The free cash flow valuation model can still be used for companies that pay dividends, but the dividends must be subtracted from the free cash flow before using the model.

Question 18

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Accepted Answer

This statement is true. A proxy allows one party to vote on behalf of another party, which can be important in determining control of a firm.

Question 19

Young & Liu Inc.'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?

Accepted Answer

The value of operations can be calculated using the formula for the value of a growing perpetuity: $ \text{Value} = \frac{\text{FCF}_1}{WACC - g} $, where $ \text{FCF}_1 $ is the free cash flow in the next period (t = 1), WACC is the weighted average cost of capital, and g is the growth rate. Given that FCF at t = 0 is $100 million and is expected to grow at a constant rate of 5%, the FCF at t = 1 will be $100 million * (1 + 0.05) = $105 million. With a WACC of 15%, the value of operations is calculated as $ \frac{105}{0.15 - 0.05} = \frac{105}{0.10} = $1,050 $ million.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

The constant growth model, also known as the Gordon Growth Model, calculates the intrinsic value of a stock based on its future series of dividends that grow at a constant rate, taking into account both the dividend payments and the capital gains from the stock price increase. This model is particularly useful for valuing companies that are expected to grow at a steady and predictable rate.

Quiz 7: Corporate Valuation and Stock Valuation

A company's free cash flow was just FCF0 = $1.50 million.The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%.What is the current value of operations?

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

The preemptive right is important to shareholders because it

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Which of the following statements is CORRECT?

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF0 in millions?

The projected cash flow for the next year for Minesuah Inc.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?

Which of the following statements is NOT CORRECT?

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

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

The free cash flow valuation model cannot be used unless a company doesn't pay dividends.

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Young & Liu Inc.'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?

Which of the following statements is CORRECT?

A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%.What is the current value of operations?

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF₀ in millions?