(9-4) Common stock cash flowsF GAnswer: a EASY
1.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.
a.True
b.False
(9-4) Marginal investor and priceF GAnswer: a EASY
2.When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.
a.True
b.False
(9-7) Free cash flows and valuationF GAnswer: a EASY
3.Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
a.True
b.False
(9-8) Preferred stockF GAnswer: b EASY
4.Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
a.True
b.False
(9-8) Preferred stockF GAnswer: a EASY
5.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.
a.True
b.False
(9-7) Corporate valuation modelC GAnswer: a MEDIUM
6.Which of the following statements is CORRECT?
a.To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
b.To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital.
c.To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
d.To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
e.The corporate valuation model requires the assumption of a constant growth rate in all years.
(9-8) Preferred stock conceptsC GAnswer: b MEDIUM
7.Which of the following statements is CORRECT?
a.Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
b.The preferred stock of a given firm is generally less risky to investors than the same firm’s common stock.
c.Corporations cannot buy the preferred stocks of other corporations.
d.Preferred dividends are not generally cumulative.
e.A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
(9-7) Corporate valuation modelC GAnswer: c EASY
8.Mooradian Corporation’s free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm’s value of operations, in millions?
a.$1,895
b.$1,995
c.$2,100
d.$2,205
e.$2,315
(9-8) Preferred stock valuationC GAnswer: e EASY
9.Molen Inc. 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 stock sell?
a.$104.27
b.$106.95
c.$109.69
d.$112.50
e.$115.38
(9-7) Corporate valuation modelC GAnswer: c MEDIUM
10.You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
a.$40.35
b.$41.82
c.$43.33
d.$44.85
e.$46.42
(9-7) Corporate valuation modelC GAnswer: e MEDIUM
11.Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or terminal) value (in millions) at t = 5?
a.$1,025
b.$1,079
c.$1,136
d.$1,196
e.$1,259
(9-7) Corporate valuation modelC GAnswer: e MEDIUM
12.Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the Year 0 value of operations, in millions?
Year123
FCF-$15.0$10.0$40.0
a.$314.51
b.$331.06
c.$348.48
d.$366.82
e.$386.13
(9-7) Corporate valuation modelC GAnswer: d MEDIUM
13.Based on the corporate valuation model, Wang Inc.’s value of operations is $750 million. Its balance sheet shows $100 million 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?
a.$386
b.$406
c.$428
d.$450
e.$473