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Exam 13: Equity Valuation

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Question 31

Multiple Choice

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The free cash flow to the firm is $300 million in perpetuity,the cost of equity equals 14% and the WACC is 10%.If the market value of the debt is $1.0 billion,what is the value of the equity using the free cash flow valuation approach?

A) $1 billion
B) $2 billion
C) $3 billion
D) $4 billion

E) A) and B)
F) B) and C)

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Question 32

Multiple Choice

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What price do you expect ART shares to sell for in 4 years?

A) $53.96
B) $44.95
C) $41.68
D) $39.76

E) All of the above
F) A) and D)

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Question 33

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The greatest value to an analyst from calculating a stock's intrinsic value is _______.

Value stocks are more likely to have a PEG ratio _____.

Grott and Perrin,Inc.has expected earnings of $3 per share for next year.The firm's ROE is 20% and its earnings retention ratio is 70%.If the firm's market capitalization rate is 15%,what is the present value of its growth opportunities?

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%.Its expected ROE is 12% and its expected EPS is $5.00.If the firm's plow-back ratio is 60%,its P/E ratio will be _________.

Firm A has a stock price of $35 and 60% of the value of the stock is in the form of PVGO.Firm B also has a stock price of $35 but only 20% of the value of Stock B is in the form of PVGO.We know that _________. I.Stock A will give us a higher return than Stock B II.an investment in Stock A is probably riskier than an investment in Stock B III.Stock A has higher forecast earnings growth than Stock B

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. -At what P/E ratio would you expect ART to sell?

Weyerhaeuser Incorporated has a balance sheet which lists $70 million in assets,$45 million in liabilities and $25 million in common shareholders' equity.It has 1,000,000 common shares outstanding.The replacement cost of its assets is $85 million.Its share price in the market is $49.Its book value per share is _________.

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year.Dividends are expected to grow at the rate of 8% per year.The riskfree rate of return is 4% and the expected return on the market portfolio is 14%.Investors use the CAPM to compute the market capitalization rate on the stock,and the constant growth DDM to determine the intrinsic value of the stock.The stock is trading in the market today at $84.00.Using the constant growth DDM and the CAPM,the beta of the stock is _________.

A stock has an intrinsic value of $15 and an actual stock price of $13.50.You know that this stock ________.

Stockholders of Dog's R Us Pet Supply expect a 12% rate of return on their stock.Management has consistently been generating a ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next five years.Given this the firm's optimal dividend payout ratio is now ______.

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00.The expected ROE is 18.0%.An appropriate required return on the stock is 14%.If the firm has a plowback ratio of 70%,its dividend in the upcoming year should be _________.

Assuming all other factors remain unchanged,__________ would increase a firm's price/earnings ratio.

A firm is planning on paying its first dividend of $2 after two years.Then dividends are expected to grow at 6% per year indefinitely.The stock's required return is 14%.What is the intrinsic value of a share today?

The free cash flow to the firm is reported as $205 million.The interest expense to the firm is $22 million.If the tax rate is 35% and the net debt of the firm increased by $25,what is the market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

A firm has a stock price of $55 per share and a P/E ratio of 75.If you buy the stock at this P/E and earnings fail to grow at all,how long should you expect it to take to just recover the cost of your investment?

A firm has an earnings retention ratio of 40%.The stock has a market capitalization rate of 15% and an ROE of 18%.What is the stock's P/E ratio?

Suppose that in 2009 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%.Using the constant growth formula for valuation,if interest rates increase to 9% the value of the market will change by _____.

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry,most likely has _________________.