Chapter 18 what is the enterprise value of this business

Format: Multiple Choice

71.

Factrack Inc., a biotech firm, is expected to grow rapidly in the next three years and

then have a level growth rate for the foreseeable future. The firm expects free cash

flows of $342.5 million, $512.3 million, and $750 million over the next three years, and

thereafter its cash flows will grow at a steady rate of 8 percent per annum. The

company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent,

what is the enterprise value of this business? (Round to the nearest million.)

A)

$19,367 million

B)

$18,101 million

C)

$26,190 million

D)

$24,923 million

Ans:

A

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72.

ProtoSeis Corp. is expected to grow rapidly in the next four years and then have a zero

growth rate for the foreseeable future. The firm expects free cash flows of $42.5

million, $64.3 million, $77.1 million and $92 million over the next four years, and

thereafter its cash flows will stay constant. The company has cash to the tune of $23.4

million. If the appropriate WACC is 10 percent, what is the enterprise value of this

business? (Do not round intermediate computations. Round final answer to the nearest

million.)

A)

$628 million

B)

$864 million

C)

$811 million

D)

$818 million

Ans:

B

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73.

Symbyrec Phonic, an electronics manufacturer, is expected to grow rapidly in the next

five years and then have a stable growth rate for the foreseeable future. The firm

expects free cash flows of $262.5 million next year. These cash flows are expected to

grow at a 30 percent rate over the following four years, and thereafter its cash flows

will grow at a steady rate of 6 percent per annum. The company has nonoperating

assets (NOA) of $31 million in the form of cash. If the appropriate WACC is 9 percent,

what is the enterprise value of this business? (Do not round intermediate computations.

Round final answer to the nearest million.)

A)

$26,490 million

B)

$22,222 million

C)

$19,014 million

D)

$22,191 million

Ans:

C

74.

Simpltar Co. is expected to grow rapidly in the next three years and then have no

growth for the foreseeable future. The firm expects free cash flows of $9.1 million,

$11.4 million, and $17.7 million over the next three years, and thereafter its cash flows

will stay constant. The company has no nonoperating assets. If the appropriate WACC

is 12 percent and debt of 44.5 million, what is the equity value of this business? (Round

final answer to the nearest million.)

A)

$135 million

B)

$105 million

C)

$45 million

D)

$90 million

Ans:

D

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75.

You are using the FCFF approach to value a business. The estimated FCFF for next

year will be $13.6 million, and it will increase at a rate of 6 percent for each of the

following five years. After that point, the FCFF will increase at a rate of 3 percent

forever. If the WACC for this firm is 8 percent, what is it worth? (Round final answer

to the nearest million.)

A)

$301 million

B)

$354 million

C)

$241 million

D)

$144 million

Ans:

A

76.

Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity,

FCFE, approach and has estimated that the FCFE in the next three years will be $6.25,

$7.70, and $8.36 million respectively. Beginning in year 4, the company expects the

cash flows to increase at a rate of 4 percent per year for the indefinite future. It is

estimated that the cost of equity is 12 percent. What is the value of equity in this

company? (Do not round intermediate computations. Round final answer to the nearest

million.)

A)

$77 million

B)

$95 million

C)

$109 million

D)

$60 million

Ans:

B

77.

You are valuing the equity of NewNil Corp. using the FCFE approach and have

estimated that the FCFE in the next three years will grow at 8 percent rate from last

year’s FCFE of $2.1 million. Beginning in year 4, you expect the cash flows to increase

at a constant rate of 5 percent per year for the indefinite future. The cost of equity for

the firm is10 percent. What is the value of equity in this company? (Round final answer

to the nearest million dollars.)

A)

$42 million

B)

$56 million

C)

$48 million

D)

$6 million

Ans:

C

78.

You are interested in investing in a private company. Based on earnings multiples of

similar publicly traded firms, you estimate the value of the private company’s stock to

be $13.44 per share. You plan to acquire a majority of the shares in the company. The

expected control premium is 12 percent, while the marketability discount for such a

firm is 15 percent. The discount for the key person, one of the founders who may leave

the firm upon your control of the firm, is 15 percent. What price should you be willing

to pay for these shares? (Round final answer to two decimal places.)

A)

$14.92 per share

B)

$16.65 per share

C)

$11.80 per share

D)

$10.88 per share

Ans:

D

79.

Shuman Wolf is interested in investing in a private company. Based on earnings

multiples of similar publicly traded firms, he estimates the value of the private

company’s stock to be $20 per share. He plans to acquire a majority of the shares in the

company. The expected control premium is 9 percent. Shuman estimates the

marketability discount for such a firm to be 11 percent. The discount for the key person,

one of the founders who may leave the firm upon Shuman’s control of the firm, is 19

percent. What price should he be willing to pay for these shares? (Round final answer

to two decimal places.)

A)

$16.47 per share

B)

$31.45 per share

C)

$15.72 per share

D)

$32.94 per share

Ans:

C

80.

Alfred Sautin wants to invest in Dieciring, Inc., a private company. Based on earnings

multiples of similar publicly traded firms, Alfred estimates the value of the private

company’s stock to be $19 per share. He plans to acquire a majority of the shares in the

company. The expected control premium is 11 percent. He estimates the marketability

discount for such a firm to be 14 percent. The discount for the key person, one of the

founders who may leave the firm upon Alfred’s control of the firm, is 16 percent. What

price should he be willing to pay for these shares? (Round final answer to two decimal

places.)

A)

$15.24 per share

B)

$18.10 per share

C)

$14.05 per share

D)

$20.70 per share

Ans:

A

81.

What difficulties are associated with valuing real assets compared to financial assets?

82.

Explain how valuations can differ between public and private companies and between

young and mature companies as well as the importance of marketability, control, and

key person considerations in valuation.

83.

What are some things to watch out for when doing multiples analysis?

be aware of the presence of a marketability discount that can be sizable.

·

Identifying one or more comparable firms is not an easy task.

differences in the capital structures of the firms being compared.

·

You are estimating a fair market value, not the investment value.

same period for which you have accounting data for the company of interest.

84.

Why does the value of a business change over time?