15 questions on valuation of firms .

Question 1

Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations?

O $1,714,750

O $1,805,000

O $1,900,000

O $2,000,000

O $2,100,000

 

Question 2

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

O Abnormally high executive compensation.

O Targeted share repurchases.

O Shareholder rights provisions.

O Restricted voting rights.

O Poison pills.

Question 3

Suppose Yon Sun Corporation’s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions?

O $948

O $998

O $1,050

O $1,103

O $1,158

 

Question 4

Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm’s value of operations, in millions?

O $158

O $167

O $175

O $184

O $193

Question 5

Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

O $23.00

O $25.56

O $28.40

O $31.24

O $34.36

 

 

Question 6

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

O To increase worker productivity.

O To enable the firm to borrow at a below-market interest rate.

O To make it easier to grant stock options to employees.

O To help prevent a hostile takeover.

O To help retain valued employees.

 

Question 7

Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

O $840

O $882

O $926

O $972

O $1,021

Question 8

Which of the following does NOT always increase a company’s market value?

O Increasing the expected growth rate of sales.

O Increasing the expected operating profitability (NOPAT/Sales).

O Decreasing the capital requirements (Capital/Sales).

O Decreasing the weighted average cost of capital.

O Increasing the expected rate of return on invested capital.

 

 

Question 9

Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year:                              1                                   2                           3

Free cash flow:             -$20                               $42                        $45

O $586

O $617

O $648

O $680

O $714

Question 10

Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).

Year:                           1                           2

Free cash flow:          -$50                      $100

O $1,456

O $1,529

O $1,606

O $1,686

O $1,770

 

 

 

Question 11

Based on the corporate valuation model, Hunsader’s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock’s price per share?

O $13.72

O $14.44

O $15.20

O $16.00

O $16.80

 

Question 12

Based on the corporate valuation model, Bernile Inc.’s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of 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?

O $429

O $451

O $475

O $500

O $525

 

 

 

Question 13

Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

O $719

O $757

O $797

O $839

O $883

Question 14

Which of the following statements is NOT CORRECT?

O The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

O The corporate valuation model discounts free cash flows by the required return on equity.

O The corporate valuation model can be used to find the value of a division.

O An important step in applying the corporate valuation model is forecasting the firm’s pro forma financial statements.

O Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

 

 

Question 15

A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?

Year:                        1                      2                                    3

Free cash flow:        -$15                 $10                                  $40

O $315

O $331

O$348

O $367

O $386







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