(9-4) Common stock cash flows
1.
F G
Answer: a
EASY
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.
a. True
b. False
(9-4) Marginal investor and price
2.
F G
Answer: a
EASY
When a new issue of stock is brought to market, it is the marginal
investor who determines the price at which the stock will trade.
a. True
b. False
(9-7) Free cash flows and valuation
3.
F G
Answer: a
EASY
Projected free cash flows should be discounted at the firm's weighted
average cost of capital to find the value of its operations.
a. True
b. False
(9-8) Preferred stock
4.
F G
Answer: b
EASY
Preferred stock is a hybrid--a sort of cross between a common stock and
a bond--in the sense that it pays dividends that normally increase
annually like a stock but its payments are contractually guaranteed
like interest on a bond.
a. True
b. False
(9-8) Preferred stock
5.
F G
Answer: a
EASY
From an investor's perspective, a firm's preferred stock is generally
considered to be less risky than its common stock but more risky than
its bonds. However, from a corporate issuer's standpoint, these risk
relationships are reversed: bonds are the most risky for the firm,
preferred is next, and common is least risky.
a. True
b. False
(9-7) Corporate valuation model
6.
C G
Answer: a
MEDIUM
Which of the following statements is CORRECT?
a. To implement the corporate valuation model, we discount projected
free cash flows at the weighted average cost of capital.
b. To implement the corporate valuation model, we discount net
operating profit after taxes (NOPAT) at the weighted average cost of
capital.
c. To implement the corporate valuation model, we discount projected
net income at the weighted average cost of capital.
d. To implement the corporate valuation model, we discount projected
free cash flows at the cost of equity capital.
e. The corporate valuation model requires the assumption of a constant
growth rate in all years.
(9-8) Preferred stock concepts
7.
C G
Answer: b
MEDIUM
Which of the following statements is CORRECT?
a. Preferred stockholders have a priority over bondholders in the event
of bankruptcy to the income, but not to the proceeds in a
liquidation.
b. The preferred stock of a given firm is generally less risky to
investors than the same firm’s common stock.
c. Corporations cannot buy the preferred stocks of other corporations.
d. Preferred dividends are not generally cumulative.
e. A big advantage of preferred stock is that dividends on preferred
stocks are tax deductible by the issuing corporation.
(9-7) Corporate valuation model
8.
Answer: c
EASY
Mooradian Corporation’s free cash flow during the just-ended year (t =
0) was $150 million, and its FCF is expected to grow at a constant rate
of 5.0% in the future. If the weighted average cost of capital is
12.5%, what is the firm’s value of operations, in millions?
a.
b.
c.
d.
e.
$1,895
$1,995
$2,100
$2,205
$2,315
(9-8) Preferred stock valuation
9.
C G
C G
Answer: e
EASY
Molen Inc. has an outstanding issue of perpetual preferred stock with
an annual dividend of $7.50 per share. If the required return on this
preferred stock is 6.5%, at what price should the stock sell?
a.
b.
c.
d.
e.
$104.27
$106.95
$109.69
$112.50
$115.38
(9-7) Corporate valuation model
10.
MEDIUM
$40.35
$41.82
$43.33
$44.85
$46.42
(9-7) Corporate valuation model
C G
Answer: e
MEDIUM
Gupta Corporation is undergoing a restructuring, and its free cash
flows are expected to vary considerably during the next few years.
However, the FCF is expected to be $65.00 million in Year 5, and the
FCF growth rate is expected to be a constant 6.5% beyond that point.
The weighted average cost of capital is 12.0%. What is the horizon (or
terminal) value (in millions) at t = 5?
a.
b.
c.
d.
e.
$1,025
$1,079
$1,136
$1,196
$1,259
(9-7) Corporate valuation model
12.
Answer: c
You have been assigned the task of using the corporate, or free cash
flow, model to estimate Petry Corporation's intrinsic value. The
firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected
to be $75.0 million, the FCFs are expected to grow at a constant rate
of 5.00% a year in the future, the company has $200 million of longterm debt and preferred stock, and it has 30 million shares of common
stock outstanding. What is the firm's estimated intrinsic value per
share of common stock?
a.
b.
c.
d.
e.
11.
C G
C G
Answer: e
MEDIUM
Ryan Enterprises forecasts the free cash flows (in millions) shown
below. The weighted average cost of capital is 13.0%, and the FCFs are
expected to continue growing at a 5.0% rate after Year 3. What is the
Year 0 value of operations, in millions?
Year
FCF
a.
b.
c.
d.
e.
$314.51
$331.06
$348.48
$366.82
$386.13
1
-$15.0
2
$10.0
3
$40.0
(9-7) Corporate valuation model
13.
C G
Answer: d
MEDIUM
Based on the corporate valuation model, Wang Inc.’s value of operations
is $750 million. Its balance sheet shows $100 million 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.
b.
c.
d.
e.
$386
$406
$428
$450
$473