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Exam 7: Valuation of stocks and corporations

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Question 1

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Based on the corporate valuation model, the value of Weidner Co.'s operations is $1, 200 million.The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity.If Weidner has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

A) $24.90
B) $27.67
C) $30.43
D) $33.48
E) $36.82

F) None of the above
G) C) and E)

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B

Question 2

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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, D?, 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?

A) $26.77
B) $27.89
C) $29.05
D) $30.21
E) $31.42

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

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Question 3

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A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Which of the following statements is NOT CORRECT?

A stock just paid a dividend of D? = $1.50.The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%.What is the current stock price?

Heath and Logan Inc.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?

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

The free cash flows (in millions) shown below are forecast by Parker & Sons.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) .

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, D??

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE) .She asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share.Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter.Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis: Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV.She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek.What is the value of rs?

Which of the following statements is CORRECT?

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return.Which of the following statements is CORRECT?

You, in analyzing a stock, find that its expected return exceeds its required return.This suggests that you think

If D? = $1.75, g (which is constant) = 3.6%, and P? = $32.00, what is the stock's expected total return for the coming year?

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.

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

According to the basic DCF 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.

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%, what is its current stock price?