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
