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Exam 18: Equity Valuation Models

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Question 51

Multiple Choice

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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 projected free cash flow of F&G Manufacturing Company for the coming year is

A) $250,000.
B) $180,000.
C) $300,000.
D) $380,000.

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Question 52

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The growth in dividends of ABC, 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 dividends is expected to be 3% per year, indefinitely.The required rate of return on ABC, Inc.is 13%.Last year's dividends per share were $1.85.What should the stock sell for today?

A) $8.99
B) $25.21
C) $40.00
D) $27.74

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Question 53

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If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities.

Historically, P/E ratios have tended to be

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Investors want high plowback ratios

GAAP allows

Suppose that the average P/E multiple in the oil industry is 20.Dominion Oil is expected to have an EPS of $3.00 in the coming year.The intrinsic value of Dominion Oil stock should be

Fly Boy Corporation is expected have EBIT of $800k this year.Fly Boy Corporation is in the 30% tax bracket, will report $52,000 in depreciation, will make $86,000 in capital expenditures, and will have a $16,000 increase in net working capital this year.What is Fly Boy's FCFF?

Low Fly 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 Low Fly Airline has a beta of 3.00.The intrinsic value of the stock is

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding.Siri's required return on equity is 12%, and WACC is 9.8%.If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

Antiquated Products Corporation produces goods that are very mature in their product life cycles.Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3.After year 3, dividends are expected to decline at a rate of 2% per year.An appropriate required rate of return for the stock is 8%.The stock should be worth

Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.

High Speed Company has an expected ROE of 15%.The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

Since 1955, Treasury bond yields and earnings yields on stocks have been