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Exam 7: Corporate Valuation and Stock Valuation

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Question 21

True/False

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According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

A) True
B) False

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Question 22

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The required return for Williamson Heating's stock is 12%, and the stock sells for $40 per share.The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D₄ = $1.00(1.30) ⁴ = $2.8561.After t = 4, the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4, i.e., what is X?

A) 5.17%
B) 5.44%
C) 5.72%
D) 6.02%
E) 6.34%

F) B) and D)
G) C) and D)

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Question 23

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Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D₁?

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

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.

Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring.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?

Which of the following statements is NOT CORRECT?

The projected cash flow for the next year for Minesuah Inc.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?

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend, D₀?

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

National Advertising just paid a dividend of D₀ = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%.What is the company's current stock price?

Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow, FCF₀ in millions?

The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (r_s) is 12.0%.What is the best estimate of the current stock price?

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

The preemptive right is important to shareholders because it

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0.The company's last dividend, D₀, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%.What is the current price of the common stock?

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%.What is Jameson's current stock price, P₀?

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.