Question 1

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the cash operating expenses for the firm.
A) 225
B) 228
C) 232
D) 242
E) 252

Accepted Answer

The answer of Exhibit 14.6
Use the Information Below for the...

Question 2

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the present value now (Year 2010)of FCFE during the period of constant growth (that is for years 2019 onwards).
A) $7,153,368
B) $9,703,476
C) $15,558,341
D) $8,986,012
E) $6,789,125

Accepted Answer

The present value of the cash flows during the constant growth period is calculated as follows:
PV year 2012 = 809,034/(0.102 - 0.05)= $15,558,341
Present value now = 15,558,341/(1.102)⁸ = $7,153,368

Question 3

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the capital for the firm.
A) 1725
B) 1953
C) 2524
D) 2385
E) 1987

Accepted Answer

The answer of Exhibit 14.6
Use the Information Below for the...

Question 4

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the present value now (Year 2010)of OFCF during the period of declining growth (that is for years 2011 to 2014).
A) $1,044,612
B) $1,554,823
C) $1,898,096
D) $1,327,547
E) $1,579,326

Accepted Answer

The answer of Exhibit 14.8
Use the Information Below for the...

Question 5

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the required rate of return on equity.
A) 5%
B) 9.2%
C) 10.2%
D) 10%
E) 4.3%

Accepted Answer

k = 0.05 + 1.3(0.04)= 0.102

Question 6

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the present value now (Year 2010)of OFCF during the period of declining growth (that is for years 2015 to 2018).
A) $1,044,612
B) $1,554,823
C) $1,898,096
D) $1,327,547
E) $1,579,326

Accepted Answer

Present value of cash flows for the years 2009 to 2012 = $1,898,096

Question 7

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the weighted average cost of capital (WACC).
A) 8.2%
B) 9.4%
C) 9.0%
D) 10.3%
E) 7.3%

Accepted Answer

WACC = (0.55)(0.094)+ (0.45)(0.09)(1 - 0.25)= 0.082

Question 8

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the adjusted operating profits before taxes.
A) $586.5
B) $225.64
C) $825.23
D) $831.56
E) $692.5

Accepted Answer

Adjusted operating profits before taxes = Operating profit + Increase in LIFO reserve + Goodwill amortization - Implied interest on op. lease= 550 + 12 + 15 - 9.5= $586.5

Question 9

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the present value now (Year 2010)of FCFE during the period of declining growth (that is for years 2015 to 2018).
A) $1,719,119
B) $1,715,784
C) $1,115,195
D) $1,434,903
E) $1,809,171

Accepted Answer

Present value of cash flows for the years 2009 to 2012 = $1,434,903

Question 10

The Pekay Company has FCFE of $800.FCFE is expected to grow by 7% next year.The cost of capital is 7% and the level of debt is $4000.The number of shares outstanding is 700.Calculate the firm's share price.
A) $44.25
B) $65.12
C) $38.19
D) $40.76
E) $50.56

Accepted Answer

The answer of The Pekay Company has FCFE of $800.FCFE...

Question 11

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the intrinsic value of the stock now (Year 2010).
A) $55
B) $48.52
C) $77.79
D) $35.77
E) $62.34

Accepted Answer

Intrinsic value per share = (1,115,195 + 1,434,903 + 7,153,368)/200,000 = $48.52

Question 12

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-You are provided with the following information about Javier Corporation.Sales for the year 2010 were $500,000,the Net Profit Margin (NPM)was 15%.Analysts project sales to grow by 12% next year (that is 2011).However,because of more competition,the NPM is expected to decline by 10% for the year 2010.The expected P/E multiple for the year 2011 is 22.The total number of shares outstanding is 20,000.Use the earnings multiplier model to calculate the expected price for Javier Corporation in the year 2011.
A) $74.25
B) $61.6
C) $82.5
D) $83.16
E) $101.64

Accepted Answer

The price is calculated as follows
Sales for 2005 = 500,000(1.12)= 560,000
New NPM = .15(1 - .1)= .135
2005 NPM = 560,000(.135)= 75,600
EPS = 75,600/20,000 = $3.78
Price = 3.78(22)= $83.16

Question 13

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-Based on the information provided,calculate the intrinsic value in 2010 of a share of INV Corp.using the FCFF (free cash flow to the firm)model.For 2010 the FCFF was $30,000,total debt was $20,000,and there were 12000 shares outstanding.The required rate of return is 9% and the estimated growth rate in FCFF is 6.5%.
A) $104.83
B) $153.25
C) $112.50
D) $94.92
E) $80.45

Accepted Answer

$$\text { Price } = \left[ \frac { 30000 ( 1.065 ) } { .09 - .065 } - 20000 \right] / 12000 = \$ 104.83$$

Question 14

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the firm's EVA.
A) 85.2
B) 72.3
C) 65.8
D) 89.5
E) 78.2

Accepted Answer

EVA is calculated as NOPAT - (WACC * Capital). NOPAT is Operating profit - Income tax expense + Tax benefits - Goodwill amortization. Capital is Net plant, property, and equipment + Other assets + Net working capital + LIFO reserve + PV of Operating leases - Accumulated Goodwill amortized.

Question 15

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-A firm has a current price of $40 a share,an expected growth rate of 11 percent and expected dividend per share (D1)of $2.Given its risk you have a required rate of return for it of 12 percent.Assuming that you expect the stock price to increase to $42 during the investment period,your expected rate of return and decision would be:
A) 10% - do not buy
B) 12% - do not buy
C) 14% - buy
D) 16% - buy
E) 18% - buy

Accepted Answer

$$\text { Expected rate of return } = \frac { \$ 42.00 - \$ 40.00 + \$ 2.00 } { \$ 40.00 } = \$ 4.00 / \$ 40.00 = 10 \%$$ Do not buy,expected return (10%)does not exceed the required return (12%).

Question 16

The Peterson Company has FCFF of $1000.FCFF is expected to grow by 12% next year.The cost of capital is 12% and the level of debt is $5000.The number of shares outstanding is 500.Calculate the firm's share price.
A) $44
B) $55
C) $34.19
D) $47.23
E) $50

Accepted Answer

The firm's share price is calculated using the formula: Share Price = (FCFF * (1 + growth rate) / (cost of capital - growth rate) - debt) / number of shares. Substituting the given values: Share Price = ($1000 * 1.12 / (0.12 - 0.12) - $5000) / 500 = $44.

Question 17

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 10 \% \
2012 & 15 \% \
2013 & 20 \% \
2014 & 25 \% \
2015 & 20 \% \
2016 & 15 \% \
2017 & 10 \% \
2018 & 7 \%
\end{array}$$ 
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the present value now (Year 2010)of FCFE during the period of increasing growth (that is for years 2011 to 2014).
A) $1,719,119
B) $1,715,784
C) $1,115,195
D) $1,434,903
E) $1,809,171

Accepted Answer

The answer of Exhibit 14.7
Use the Information Below for the...

Question 18

Exhibit 14.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { l c c } 
& \text { Wal-Elue } & \text { Industry } \
 \text { DPS } & 1.00 & 1.50 \
\text { Total As5et Tunover } & 3.20 & 2.50 \
\text { Net Profit Marpin } & 3.50 \% & 3.00 \% \
\text { EpS } & 4.00 & 3.00 \
\text { Total As5ets/Equity } & 3.00 & 4.00
\end{array}$$
-Based on the information provided,calculate the intrinsic value in 2010 of a share of INV Corp.using the Present Value of Earnings Model (infinite holding period).For 2010 net income was $250,000,total debt was $50,000,and there were 206,263 shares outstanding.The required rate of return is 12% and the estimated growth rate in earnings is 5.5%.
A) $19.43
B) $23.98
C) $28.52
D) $22.73
E) $15.50

Accepted Answer

$$\text { Price } = \left[ \frac { 250000 ( 1.055 ) } { .12 - .055 } - 50000 \right] / 206263 = \$ 19.43$$

Question 19

Exhibit 14.6
Use the Information Below for the Following Problem(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm.
 $\begin{array}{c}
\begin{array}{lll}
\text{LIFO reserve}\
\text{Net plant, property, and equipment}\ \text{Other assets}\
\text{Goodwill}\
\text{Accumulated Goodwill amortized}\
\text{PV of Operating leases}\
\text{Tax benefit from interest on expenses}\
\text{Tax benefit from interest on leases}\
\text{Taxes on non-operating income}\
\text{Implied interest on op. lease}\
\text{Increase in LIFO reserve}\
\text{Goodwill amortization}\
\text{Operating profit}\
\text{Income tax expense}\
\text{Net working capital}\
\text{WACC}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
60\
1325 \
325 \
325 \
65 \
140\
10\
5\
2\
9.5\
12\
15\
550\
215\
440\
0.12\
\end{array}
\end{array}$
-Refer to Exhibit 14.6.Calculate the dollar cost of capital.
A) 286.2
B) 207
C) 234.36
D) 238.44
E) 302.9

Accepted Answer

The dollar cost of capital is calculated as WACC multiplied by the capital employed. Capital employed is the sum of net plant, property, and equipment, other assets, net working capital, and LIFO reserve. Thus, (1325 + 325 + 440 + 60) * 0.12 = 286.2.

Question 20

Exhibit 14.8
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF
 $$\begin{array} { c c } 
\text { Year } & \text { Grapth Rata } \
\hline 2011 & 25 \% \
2012 & 20 \% \
2013 & 15 \% \
2014 & 10 \% \
2015 & 12 \% \
2016 & 14 \% \
2017 & 16 \% \
2018 & 18 \%
\end{array}$$ 
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 14.8.Calculate the required rate of return on equity.
A) 8.2%
B) 9.4%
C) 9.0%
D) 10.3%
E) 7.3%

Accepted Answer

Required return on equity = k = 0.05 + 1.1(0.04)= 0.094

Quiz 14: Company Analysis and Stock Valuation

The Pekay Company has FCFE of $800.FCFE is expected to grow by 7% next year.The cost of capital is 7% and the level of debt is $4000.The number of shares outstanding is 700.Calculate the firm's share price.

The Peterson Company has FCFF of $1000.FCFF is expected to grow by 12% next year.The cost of capital is 12% and the level of debt is $5000.The number of shares outstanding is 500.Calculate the firm's share price.