69) ART has come out with a new and improved product. As a result, the firm projects an ROE
of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
Investors expect a 12% rate of return on the stock.
At what P/E ratio would you expect ART to sell?
A) 8.33
B) 11.43
C) 14.29
D) 15.25
70) ART has come out with a new and improved product. As a result, the firm projects an ROE
of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
Investors expect a 12% rate of return on the stock.
What is the present value of growth opportunities for ART?
A) $8.57
B) $9.29
C) $14.29
D) $16.29
71) ART has come out with a new and improved product. As a result, the firm projects an ROE
of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
Investors expect a 12% rate of return on the stock.
What price do you expect ART shares to sell for in 4 years?
A) $53.96
B) $44.95
C) $41.68
D) $39.76
72) The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures
are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?
A) $85
B) $125
C) $185
D) $305
73) A firm reports EBIT of $100 million. The income statement shows depreciation of $20
million. If the tax rate is 35% and total capital expenditures and increases in working capital total
$10 million, what is the free cash flow to the firm?
A) $57
B) $65
C) $75
D) $95
74) The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%,
and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the
equity using the free cash flow valuation approach?
A) $1 billion
B) $2 billion
C) $3 billion
D) $4 billion
75) If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at
3% forever, what is the total firm value given a WACC of 9.5%?
A) $679.81 million
B) $715.54 million
C) $769.23 million
D) $803.03 million
76) The free cash flow to the firm is reported as $405 million. The interest expense to the firm is
$76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is
the free cash flow to the equity holders of the firm?
A) $405.6 million
B) $454.2 million
C) $505.8 million
D) $553.5 million
77) The free cash flow to the firm is reported as $275 million. The interest expense to the firm is
$60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is
the free cash flow to the equity holders of the firm?
A) $269 million
B) $296 million
C) $305 million
D) $327 million
78) The free cash flow to the firm is reported as $205 million. The interest expense to the firm is
$22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is
the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?
A) $2,168 billion
B) $2,445 billion
C) $2,565 billion
D) $2,998 billion
79) The free cash flow to the firm is reported as $198 million. The interest expense to the firm is
$15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is
the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?
A) $1,950 billion
B) $2,497 billion
C) $2,585 billion
D) $3,098 billion
80) Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO.
Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of
PVGO. We know that:
I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
81) A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of
its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?
A) $27.27
B) $37.50
C) $66.67
D) $70
82) Next year’s earnings are estimated to be $5. The company plans to reinvest 20% of its
earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?
A) $9.09
B) $10.10
C) $11.11
D) $12.21
83) Next year’s earnings are estimated to be $6. The company plans to reinvest 33% of its
earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?
A) $6
B) $24.50
C) $44.44
D) $75
84) When Google’s share price reached $475 per share, Google had a P/E ratio of about 68 and
an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately
what percentage of Google’s stock price was represented by PVGO?
A) 92%
B) 87%
C) 77%
D) 64%
85) A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this
P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost
of your investment?
A) 27 years
B) 37 years
C) 55 years
D) 75 years
86) In what industry are investors likely to use the dividend discount model and arrive at a price
close to the observed market price?
A) import/export trade
B) software
C) telecommunications
D) utility
87) Estimates of a stock’s intrinsic value calculated with the free cash flow methodology depend
most critically on ________.
A) the terminal value used
B) whether one uses FCFF or FCFE
C) the time period used to estimate the cash flows
D) whether the firm is currently paying dividends
88) The greatest value to an analyst from calculating a stock’s intrinsic value is ________.
A) how easy it is to come up with accurate model inputs
B) the precision of the value estimate
C) how the process forces analysts to understand the critical variables that have the greatest
impact on value
D) how all the different models typically yield identical value results
89) Which of the following valuation measures is often used to compare firms that have no
earnings?
A) price-to-book ratio
B) P/E ratio
C) price-to–cash-flow ratio
D) price-to-sales ratio
90) The term “residual claimant” refers to
A) bond holders.
B) option holders.
C) equity/shareholders.
D) suppliers.
91) The SEC requires public U.S. companies to file registration statements and periodic reports
electronically through
A) Yahoo.
B) Google.
C) EDGAR.
D) FINRA.
92) The PEG ratio normalizes the P/E ratio by the
A) tax rate.
B) growth rate.
C) market cap.
D) book rate.
93) You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4%
return on this investment, what should you be willing to pay for this stock?
A) $11.25
B) $112.50
C) $4.50
D) $45.00
94) Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100
million shares outstanding, what was its dividend last year?
A) $3.00
B) $3.75
C) $4.50
D) $7.50