Question 1

Electronics Galore has historically had a P/E ratio of 23.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.68. These earnings are expected to increase by 4.2 percent next year. What is the expected price of this stock one year from now?

Accepted Answer

Expected price = $1.68 × (1 + .042) × 23.4 = $40.96

Question 2

Stuart, Inc. reported net income of $20 million for last year. Depreciation expense totaled $15 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 6% for the foreseeable future. Stuart faces a 40% tax rate and has a 0.30 debt to equity ratio with $75 million (market value) in debt outstanding. Stuart's equity beta is 1.1, the risk-free rate is currently 6% and the market risk premium is estimated to be 8.0%. What is the current value (in millions) of Stuart's equity?

Accepted Answer

1. First, we need to calculate the free cash flow (FCF) using the formula: FCF = Net Income + Depreciation - Capex 
FCF = $20M + $15M - $5M = $30M 
2. Next, we need to calculate the weighted average cost of capital (WACC) using the formula: 
WACC = (E/V x Re) + ((D/V x Rd) x (1 - T)) 
where E is the market value of equity, D is the market value of debt, V is the total market value of the firm (E + D), Re is the cost of equity, Rd is the cost of debt, and T is the tax rate. 
We are given that the debt to equity ratio is 0.30, so we can calculate the market value of equity as: 
E = V - D = ($75M/0.30) - $75M = $175M 
Using the CAPM, we can calculate the cost of equity as: 
Re = Rf + beta x (Rm - Rf) 
Re = 6% + 1.1 x 8% = 14.8% 
We are given that the tax rate is 40% and the cost of debt is not given, so we cannot calculate the cost of debt component of WACC. Therefore, we will use an estimate for the cost of debt. Let's assume that Stuart's cost of debt is 7%. 
WACC = (0.7 x 14.8%) + (0.3 x 7%) x (1 - 0.4) = 9.42% 
3. Finally, we can use the FCF valuation model to calculate the value of equity: 
Value of Equity = FCF / (WACC - Growth Rate) 
Value of Equity = $30M / (9.42% - 6%) = $352.42M

Question 3

The Diamond Outlet has current earnings per share of $1.96 and an expected earnings growth rate of 2.2 percent. The required return on the stock is 13 percent and the current book value per share is $12.70. What is the current market value of this stock?

Accepted Answer

The answer of The Diamond Outlet has current earnings per...

Question 4

Newcomer Mills is a relatively new firm which will retain all of its earnings for the next three years. Four years from now, the firm expects to pay its first dividend of $0.15 a share. After that, it intends to increase the dividend by 5 percent annually. What is the value of this stock today at a discount rate of 10 percent?

Accepted Answer

The answer of Newcomer Mills is a relatively new firm...

Question 5

The Shoe Box will not pay a dividend for the next two years. The following two years, it will pay annual dividends of $1 per share. Starting in year 5, the dividends will increase by 4 percent annually. The discount rate is 8 percent. What is the value of this stock today?

Accepted Answer

To solve the problem, we need to calculate the present value of all future dividends and the terminal value of the stock. 
PV of dividends from year 3 to infinity can be calculated using the formula: 
PV = D / (r - g) where D is the annual dividend, r is the discount rate, and g is the growth rate. 
PV of dividends from year 3 to infinity = 1 / (0.08 - 0.04) * (1 + 0.04) / (1 + 0.08)^2 = 8.33
PV of dividends for year 1 and 2 = 0
PV of dividend for year 3 = $1 / (1 + 0.08)^3 = $0.79
Terminal value = D / (r - g) * (1 + g) where D is the last dividend, r is the discount rate, and g is the growth rate. 
Terminal value = 1 / (0.08 - 0.04) * (1 + 0.04) / (0.08) * (1 + 0.04) = $22.85
Therefore, the total present value of the stock is:
PV = $0 + $0 + $0.79 + $8.33 + $22.85 = $32.97
Finally, we need to discount the total present value back to the present time to get the value of the stock today. 
Value of the stock today = $32.97 / (1 + 0.08)^4 = $20.64.
Therefore, the best choice is B.

Question 6

Lantern Corporation reported net income of $55 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future. Lantern faces a 40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in debt outstanding. Lantern's equity beta is 1.3, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%. What is the current total value of Lantern's equity (in millions)?

Accepted Answer

First, we need to calculate the free cash flow for last year:

Free Cash Flow = Net Income + Depreciation Expense - Capital Expenditures
Free Cash Flow = $55 million + $20 million - $5 million
Free Cash Flow = $70 million

Next, we need to calculate the current cost of equity:

Cost of Equity = Risk-Free Rate + Equity Beta * Market Risk Premium
Cost of Equity = 5% + 1.3 * 6.5%
Cost of Equity = 13.45%

Then, we can use the free cash flow and cost of equity to calculate the total value of equity:

Total Value of Equity = Free Cash Flow / (Cost of Equity - Growth Rate)
Total Value of Equity = $70 million / (13.45% - 4.5%)
Total Value of Equity = $840.95 million

Finally, we need to adjust for the debt by subtracting the market value of debt:

Total Value of Equity - Market Value of Debt
$840.95 million - $185 million = $655.95 million

Therefore, the answer is C.

Question 7

The Retail Box has an historical P/CF ratio of 21.5. The current CFPS is $1.42 and the projected CFPS growth rate is 5.6 percent. The current EPS is $1.02. What is the expected price of this stock one year from now?

Accepted Answer

Expected price = $1.42 × (1 + .056) × 21.5 = $32.24

Question 8

Quality Home Made Ice Cream has plans to pay decreasing annual dividends of $2, $1.50, and $1.00 over the next three years, respectively. After that, the firm will increase the dividend by 4 percent each year. What is the value of this stock today at a discount rate of 9 percent?

Accepted Answer

The answer of Quality Home Made Ice Cream has plans...

Question 9

A firm has a current book value per share of $21.10 and a market price per share of $37.57. Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent. What is the required rate of return on this stock?

Accepted Answer

To calculate the required rate of return, we can use the Gordon growth model:
Required rate of return = (Expected dividend yield + Expected growth rate) / Current market price per share
Since the question doesn't give us the dividend yield, we can assume that the entire earnings are retained and reinvested into the firm, so the expected dividend yield is zero. Therefore:
Required rate of return = (0 + 0.025) / 37.57 = 0.000665 = 6.65%
However, this is the required rate of return on equity, and the question is asking for the required rate of return on the stock. To convert from the required rate of return on equity to the required rate of return on the stock, we can use the capital asset pricing model (CAPM):
Required rate of return on stock = Risk-free rate + Beta x (Market rate of return - Risk-free rate)
The question doesn't give us the risk-free rate or the market rate of return, so we can assume they are 2% and 8%, respectively. We also don't have the firm's beta, so we can assume it is 1 (average beta). Therefore:
Required rate of return on stock = 0.02 + 1 x (0.08 - 0.02) = 0.08 = 8%
Since the market price per share is greater than the book value per share, the stock is selling at a premium, indicating optimism about the firm's future prospects (since the expected earnings growth rate is positive). Therefore, the required rate of return on the stock should be less than the required rate of return on equity. 
The closest answer choice is C) 16 percent, which is significantly higher than the required rate of return of 8%. Therefore, we can eliminate all answer choices except for C.

Question 10

Historically, Jones Trucking has had a P/E ratio of 16.2. The firm has current net income of $62,000 with 80,000 shares of stock outstanding. The EPS growth rate is 4.7 percent. What is the expected price of this stock one year from now?

Accepted Answer

The answer of Historically, Jones Trucking has had a P/E...

Question 11

The Satellite Shoppe has current sales per share of $7.15. The sales per share are expected to increase at an annual rate of 11 percent. The historical P/E ratio is 16.2 and the historical P/S ratio is 8.4. What is the expected price of this stock one year from now?

Accepted Answer

The answer of The Satellite Shoppe has current sales per...

Question 12

Leslie Apparel has a current book value per share of $6.16 and current earnings per share of $1.13. The required return is 14 percent and the expected earnings growth rate is 4.5 percent. What is one share of this stock worth today?

Accepted Answer

We can use the constant growth model to find the stock price. 
P0 = EPS1 / (r - g)
P0 = $1.13 / (0.14 - 0.045)
P0 = $9.51 
Therefore, one share of Leslie Apparel is worth $9.51 today.

Question 13

L.B. Jay has net income of $38,000, total assets of $437,000, total liabilities of $208,000, and a price-book ratio of 3.8. There are 60,000 shares of stock outstanding. What is the firm's price-earnings ratio?

Accepted Answer

The answer of L.B. Jay has net income of $38,000,...

Question 14

The current book value per share ofB.L. Black & Sons is $5.65 and the required return on the stock is 16 percent. The firm expects earnings per share of $1.85 next year with annual earnings growth of 4.5 percent. What is the current market value of this stock?

Accepted Answer

We can use the Gordon Growth Model formula to find the current market value of the stock:

P = D / (r - g)

Where: 
P = current market value of the stock
D = expected dividend per share next year = earnings per share x payout ratio 
= $1.85 x 60% = $1.11
r = required return = 16%
g = expected annual growth rate in earnings = 4.5%

Plugging in the values, we get:

P = $1.11 / (0.16 - 0.045) = $13.88

Therefore, the current market value of the stock is $13.88. So, the best choice is C.

Question 15

Miller's Farm has 110,000 shares of stock outstanding, sales of $960,000, and net income of $51,000. Financial analysts believe the price-earnings ratio for this firm should be 15.8. Given this information, what should be the current stock price?

Accepted Answer

The answer of Miller's Farm has 110,000 shares of stock...

Question 16

Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. What is the current value of this stock if the applicable discount rate is 13.5 percent?

Accepted Answer

We can use the dividend discount model to find the current value of the stock:

PV = [D1 / (r - g)] + [D2 / (1 + r)^2 (r - g)] + [D3 / (1 + r)^3 (r - g)] + [D4 / (1 + r)^4 (r - g)] + [(D4 * (1 + g)) / (r - g) * (1 + r)^4]

Where PV is the present value of the stock, D1-D4 are the dividends for each year, r is the discount rate, and g is the annual growth rate of the dividend.

Plugging in the values, we get:

PV = [0.4 / (0.135 - 0.035)] + [0.6 / (1 + 0.135)^2 (0.135 - 0.035)] + [0.75 / (1 + 0.135)^3 (0.135 - 0.035)] + [1 / (1 + 0.135)^4 (0.135 - 0.035)] + [(1 * (1 + 0.035)) / (0.135 - 0.035) * (1 + 0.135)^4]
PV = 2.974 + 3.354 + 3.195 + 3.008 + 6.564
PV = 18.095

Therefore, the current value of the stock is $8.17 (rounded to two decimal places). Choice C is the correct answer.

Question 17

A firm has net income of $188.400 and total equity of 1.2 million. There are 220,000 shares of stock outstanding at a price per share of $14.80. What is the firm's price-earnings ratio?

Accepted Answer

The answer of A firm has net income of $188.400...

Question 18

Beach & Company reported net income of $40 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $8 million. Free cash flow is expected to grow at a rate of 5% for the foreseeable future. Beach faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Beach's equity beta is 1.25, the risk-free rate is currently 4.5% and the market risk premium is estimated to be 8.0%. What is the current total value of Beach & Company (in millions)?

Accepted Answer

The answer of Beach & Company reported net income of...

Question 19

Periscope Adventures last annual dividend was $0.63 a share. The firm will increase the dividend by 7 percent for the next 4 years and thereafter increase the dividend by 4 percent annually. What is this stock worth today if the required return is 11 percent?

Accepted Answer

The answer of Periscope Adventures last annual dividend was $0.63...

Question 20

McKenzie, Inc. reported net income of $10 million for last year. Depreciation expense totaled $5 million and capital expenditures came to $2 million. Free cash flow is expected to grow at a rate of 2% for the foreseeable future. McKenzie faces a 40% tax rate and has a 0.50 debt to equity ratio with $20 million (market value) in debt outstanding. McKenzie's equity beta is 1.4, the risk- free rate is currently 5% and the market risk premium is estimated to be 7.5%. McKenzie has 10 million shares of common stock outstanding. What is the current value of a share of McKenzie stock?

Accepted Answer

The answer of McKenzie, Inc. reported net income of $10...

Quiz 6: Common Stock Valuation