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Exam 18: Equity Valuation Models

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Question 1

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Consider the free cash flow approach to stock valuation.F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year.The firm's corporate tax rate is 40%.It is expected that $250,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $125,000.After the coming year, cash flows are expected to grow at 7% per year.The appropriate market capitalization rate for unleveraged cash flow is 13% per year.The firm has no outstanding debt.The total value of the equity of F&G Manufacturing Company should be

A) $1,615,156.50.
B) $2,479,168.95.
C) $3,333,333.33.
D) $4,166,666.67.

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Question 2

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Mature Products Corporation produces goods that are very mature in their product life cycles.Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3.After year 3, dividends are expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth

A) $9.00.
B) $10.57.
C) $20.00.
D) $22.22.

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Question 3

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Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%.The stock of Midwest Airline has a beta of 3.00.The return you should require on the stock is

If a firm has a required rate of return equal to the ROE,

The most appropriate discount rate to use when applying a FCFF valuation model is the

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities) .

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%.The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock?

If a firm follows a low-investment-rate plan (applies a low plowback ratio) , its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.

The most popular approach to forecasting the overall stock market is to use

The growth in per share FCFE of FOX, Inc.is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years.After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely.The required rate of return on FOX, Inc.is 13%.Last year's per share FCFE was $1.85.What should the stock sell for today?

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

A company paid a dividend last year of $1.75.The expected ROE for next year is 14.5%.An appropriate required return on the stock is 10%.If the firm has a plowback ratio of 75%, the dividend in the coming year should be

The market-capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13%, and the expected EPS are $3.60.If the firm's plowback ratio is 50%, the P/E ratio will be

The growth in per share FCFE of CBS, Inc.is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years.After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely.The required rate of return on CBS, Inc.is 12%.Last year's per share FCFE was $2.00.What should the stock sell for today?

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Consider the free cash flow approach to stock valuation.Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year.The firm's corporate tax rate is 30%.It is expected that $200,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $100,000.After the coming year, cash flows are expected to grow at 6% per year.The appropriate market capitalization rate for unleveraged cash flow is 15% per year.The firm has no outstanding debt.The total value of the equity of Utica Manufacturing Company should be

Which of the following is the best measure of the floor for a stock price?

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid.After that, the dividend is expected to increase at a constant rate of 5%.If you require a 12% return on the stock, the value of the stock is

The ______ is a common term for the market consensus value of the required return on a stock.