Chapter 13(13Thed.) Probset Corporate Valuation Value Based Management

Corporate Finance

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Chapter 13(13thed.) Probset –Corporate Valuation – Value Based Management

1.Which of the following is not a barrier to a hostile takeover?

a.Nonpecuniary benefits.

b.Targeted share repurchases.

c.Shareholder rights provision.

d.Restricted voting rights.

e.Poison pill.

2.Which of the following statements is not correct?

a.The corporate valuation model can be used even for a company that does not pay dividends.

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

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

d.An important step in applying the corporate valuation model is forecasting the pro forma financial statements.

e.Free cash flows must grow at a constant rate in order to find the horizon, or terminal, value.

3.Which of the following is not always a way to increase the value of a company?

a.Increase the growth rate of sales.

b.Increase the operating profitability (NOPAT/Sales).

c.Decrease the capital requirement (Capital/Sales).

d.Decrease the weighted average cost of capital.

e.Increase the expected return on invested capital.

4.Suppose a company’s projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company’s weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million?

a. $530 million

b. $4,545 million

c. $8,333 million

d.$10,000 million

e.$10,600 million

5.A company forecasts free cash flow of $50 million in five years. It expects the free cash flow to grow at a constant rate of 6 percent thereafter. If the weighted average cost of capital is 12 percent, what is the horizon value, to the nearest million?

a. $53 million

b.$501 million

c.$600 million

d.$833 million

e.$883 million

6.A company forecasts free cash flow in one year to be -$10 million and free cash flow in two years to be $20 million. After the second year, free cash flow will grow at a constant rate of 4 percent per year forever. If the overall cost of capital is 14 percent, what is the current value of operations, to the nearest million?

a.$150 million

b.$167 million

c.$200 million

d.$208 million

e.$228 million

7.Using the corporate valuation model, the value of a company’s operations is $750 million.The company’s balance sheet shows $50 million in short-term investments that are unrelated to operations. The balance sheet also shows $100 million in accounts payable, $100 million in notes payable, $200 million in long-term debt, $40 million in common stock (par plus paid-in-capital), and $160 million in retained earnings. What is your best estimate for the market value of equity?

a.$200 million

b.$300 million

c.$400 million

d.$500 million

e.$600 million

8.Using the corporate valuation model, the value of a company’s operations is $400 million.The company’s balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $50 million in accounts payable, $90 million in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company has 10 million shares of stock, what is your best estimate for the stock price per share?

a.$10

b.$21

c.$24

d.$26

e.$42