Chapter 09: Stocks and Their Valuation
Chapter 09: Stocks and Their Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 38
Free Cash flow –$50 $145
a. $2,260
b. $2,452
c. $2,345
d. $1,876
e. $2,132
74. Ryan Enterprises forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating
assets. 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 firm’s total corporate value (in millions)? Do not round intermediate calculations.
Year 1 2 3
FCF -$15.0 $10.0 $55.0
a. $564.95
b. $660.88
c. $522.31
d. $442.37
e. $532.97
Copyright Cengage Learning. Powered by Cognero.
Page 40
76. Based on the corporate valuation model, Gray Entertainment’s total corporate value is $1,175 million. The company’s
balance sheet shows $120 million of notes payable, $300 million of long-term debt, $50 million of preferred stock, $180
million of retained earnings, and $800 million of total common equity. If the company has 30 million shares of stock
outstanding, what is the best estimate of its price per share?
a. $24.44
b. $27.97
c. $23.50
d. $28.20
e. $29.38
77. Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $725 million. Its balance sheet
shows $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 its stock price per share?
a. $20.20
b. $18.18
c. $21.21
d. $22.83
e. $24.44
Copyright Cengage Learning. Powered by Cognero.
Page 42
79. Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $70.00, what is its nominal
(not effective) annual rate of return?
a. 4.29%
b. 6.57%
c. 6.74%
d. 4.86%
e. 5.71%
80. Rebello’s preferred stock pays a dividend of $1.00 per quarter, and it sells for $57.50 per share. What is its effective
annual (not nominal) rate of return?
a. 6.78%
b. 8.07%
c. 7.28%
d. 8.14%
e. 7.14%
Copyright Cengage Learning. Powered by Cognero.
Page 46
85. Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15.0% 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? Do not round intermediate calculations.
a. $31.49
b. $39.53
c. $26.80
d. $33.50
e. $34.17
86. Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its
earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25
dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant
rate of 8.00% thereafter. Management’s forecast of the future dividend stream, along with the forecasted growth rates, is
shown below. Assuming a required return of 11.00%, what is your estimate of the stock’s current value? Use the dividend
values provided in the table below for your calculations. Do not round your intermediate calculations.
Year 0 1 2 3 4 5 6
Growth rate NA NA NA NA 60.00% 30.00% 8.00%
Dividends $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562
a. $11.87
b. $11.28
c. $13.65
d. $13.30
e. $12.23
Chapter 09: Stocks and Their Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 47
60.00% 30.00% 8.00%
Dividend $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562
87. Savickas Petroleum’s stock has a required return of 12.00%, and the stock sells for $44.00 per share. The firm just
paid a dividend of $1.00, and the dividend is expected to grow by 30.00% per year for the next 4 years, so D4 =
$1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is
the stock’s expected constant growth rate after t = 4, i.e., what is X? Do not round your intermediate calculations.
a. 6.91%
b. 8.01%
c. 7.05%
d. 5.60%
e. 5.73%
30.00% 30.00% 30.00% 30.00% 6.91%
Dividend $1.0000 $1.3000 $1.6900 $2.1970 $2.8561 $3.0534
Chapter 09: Stocks and Their Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 49
that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error
process is 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?
a. 15.47%
b. 10.64%
c. 16.46%
d. 12.20%
e. 14.19%
