Question 1

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

Accepted Answer

Liquidation value per share of common stock is calculated based on the amount that would be received if all assets were sold (often at market value, not just accounting value) and liabilities paid off, with the remaining proceeds then divided among common stockholders. The market value of assets can differ significantly from their accounting value.

Question 2

The common stock book value model ignores a firm's expected earnings potential and generally lacks any true relationship to the firm's value in the marketplace.

Accepted Answer

The common stock book value model only considers the value of a company's assets and liabilities, without taking into account its earnings potential or market value. As a result, it may not accurately reflect the true value of a company in the marketplace.

Question 3

Ted Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is $500,000, and Ted has a half million shares of stock outstanding, what is the value of Ted stock?

Accepted Answer

The value of Ted stock can be calculated using the two-stage dividend discount model (DDM), which accounts for the initial period of stable growth and the subsequent period of perpetual growth. First, calculate the present value of the initial five years of free cash flows. Then, calculate the terminal value at the end of year 5, which represents the present value of all future cash flows beyond year 5, growing at a constant rate forever. Finally, subtract the market value of the firm's debt from the total present value to find the equity value and divide by the number of shares to find the value per share.1. Present Value of Initial 5 Years of Free Cash Flows:$$ PV = \frac{\$200,000}{(1+0.15)^1} + \frac{\$200,000}{(1+0.15)^2} + \frac{\$200,000}{(1+0.15)^3} + \frac{\$200,000}{(1+0.15)^4} + \frac{\$200,000}{(1+0.15)^5} $$2. Terminal Value at the end of Year 5:$$ TV = \frac{\$200,000 \times (1+0.05)}{0.15 - 0.05} $$$$ TV = \frac{\$210,000}{0.10} = \$2,100,000 $$$$ PV(TV) = \frac{\$2,100,000}{(1+0.15)^5} $$3. Total Present Value (TPV) = PV of Initial 5 Years + PV of Terminal Value.4. Equity Value = TPV - Market Value of Debt.5. Value per Share = Equity Value / Number of Shares.Given the complexity of the calculations and the absence of specific numerical calculations here, the key is understanding that the value per share is derived from the present value of future cash flows minus debt, divided by the number of shares. The correct answer, based on the methodology and the options provided, is A) $2.43, assuming the calculations lead to a value close to this figure after following the steps outlined. This is a simplified explanation; the actual calculation would require performing the detailed math as per the steps.

Question 4

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

Accepted Answer

The projected earnings per share (EPS) is $1.5 million / 1,000,000 shares = $1.50. Using the industry P/E multiple of 15, the stock price should be 15 * $1.50 = $22.50.

Question 5

The book value per share of common stock is the amount per share of common stock that would be received if all of a firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

Accepted Answer

The book value per share of common stock is indeed calculated based on the accounting value of a firm's assets and the distribution of proceeds among common stockholders if all assets were to be sold.

Question 6

________ is the actual amount each common stockholder would expect to receive if a firm's assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

Accepted Answer

The liquidation value is the amount that common stockholders can expect to receive if the company is sold off, after all debts have been repaid. This represents the actual value of the common stock, as opposed to book value, which is based on the accounting value of the assets and liabilities on the balance sheet. P/E multiple is a valuation ratio used by investors to measure a company's value while the present value of the dividends represents the present day value of all expected future dividend payments.

Question 7

Which of the following valuation methods is superior to others in the list since it considers expected earnings?

Accepted Answer

The P/E (price-to-earnings) multiple is regarded as superior, as it considers expected earnings in determining the value of a company. The liquidation value and book value do not take into account future earnings potential, while the present value of interest is more applicable in debt investments rather than equity valuation.

Question 8

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.

Accepted Answer

The answer of Tangshan China's stock is currently selling for...

Question 9

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

Accepted Answer

In a liquidation scenario, all assets are sold and the proceeds are distributed to creditors and shareholders. The liquidation value per share of common stock is the amount that each shareholder would receive if all assets were sold and all liabilities were paid off.

Liquidation value per share of common stock = (Total assets - Total liabilities) / Number of common shares outstanding
Liquidation value per share of common stock = ($52.5 million - $45 million) / 1,000,000
Liquidation value per share of common stock = $7.50

Question 10

Due to growing demand for computer software, the Shine Company has had a very successful year and expects its earnings per share to grow by 25 percent to reach $5.50 for this year. Estimate the price of the company's common stock assuming the industry's price/earning ratio is 12.

Accepted Answer

The answer of Due to growing demand for computer software,...

Question 11

________ is a guide to a firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

Accepted Answer

The P/E multiple, also known as the price-to-earnings ratio, is a valuation metric used to determine the relative value of a company's shares. It is calculated by dividing the current market price per share by its earnings per share. The P/E multiple reflects investors' expectations for future earnings growth, risk, and other factors. If a firm has a higher P/E multiple than its peers, it may indicate that investors have higher expectations for its future growth potential. Conversely, if a firm has a lower P/E multiple than its peers, it may indicate that investors have lower expectations for its future growth potential.

Question 12

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

Accepted Answer

The answer of Based on analysis of the company and...

Question 13

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.

Accepted Answer

To determine if Tangshan China's stock is overvalued or undervalued, we first calculate the required rate of return using the Capital Asset Pricing Model (CAPM): Required Rate of Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) = 3% + 1.2 * (8% - 3%) = 9%. Next, we use the Gordon Growth Model to find the intrinsic value of the stock: Price = Dividend * (1 + Growth Rate) / (Required Rate of Return - Growth Rate) = $5.50 * (1 + 0.05) / (0.09 - 0.05) = $143.75. Since the market price ($160) is higher than the calculated intrinsic value ($143.75), the stock is overvalued.

Question 14

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

Accepted Answer

Using the P/E ratio formula, we can find the expected future price of the stock: 
P/E ratio = Price per share / Earnings per share 
15 = Price per share / 2 
Price per share = 30 
Adding the expected dividend of $1, the future price of DEF's stock would be $31. Therefore, the best choice is D.

Question 15

China Imports currently has 2,000 shares of common stock outstanding. The firm has assets of $200,000 and total liabilities including preferred stock of $75,000. Calculate the book value per share of China Imports common stock.

Accepted Answer

The answer of China Imports currently has 2,000 shares of...

Question 16

Ride World has estimated the market value of its assets to be $1,250,000. What is the value of Ride World's common stock if it has $900,000 in liabilities, $50,000 in preferred stock, and 7,500 shares of common stock outstanding?

Accepted Answer

The answer of Ride World has estimated the market value...

Question 17

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Based on this information, Tangshan's book value per share of common stock is ________.

Accepted Answer

The book value per share is calculated as (Total Assets - Total Liabilities) / Number of Common Shares. Here, ($60 million - $45 million) / 1,000,000 shares = $15 per share.

Question 18

Karina's Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina's common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding?

Accepted Answer

The answer of Karina's Caribbean Foods had total assets as...

Question 19

The use of the ________ is especially helpful in valuing firms that are not publicly traded.

Accepted Answer

The P/E multiple is often used to value firms that are not publicly traded by comparing them to similar publicly traded companies.

Question 20

________ is the value of a firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.

Accepted Answer

Book value represents the value of a firm's equity if all assets were sold for their exact accounting value and the proceeds were used to pay off all liabilities, with the remainder distributed among common stockholders.

Quiz 7: Stock Valuation