Chapter 9: Stocks Conceptual M/C Page 1
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. A proxy is a document giving one party the authority to act for another
party, including the power to vote shares of common stock. Proxies can
be important tools relating to control of firms.
a. True
b. False
2. The preemptive right gives current stockholders the right to purchase,
on a pro rata basis, any new shares issued by the firm. This right
helps protect current stockholders against both dilution of control and
dilution of value.
a. True
b. False
3. If a firm’s stockholders are given the preemptive right, this means
that stockholders have the right to call for a meeting to vote to
replace the management. Without the preemptive right, dissident
stockholders would have to seek a change in management through a proxy
fight.
a. True
b. False
4. Classified stock differentiates various classes of common stock, and
using it is one way companies can meet special needs such as when owners
of a start-up firm need additional equity capital but don’t want to
relinquish voting control.
a. True
b. False
5. Founders’ shares are a type of classified stock where the shares are
owned by the firm’s founders, and they generally have more votes per
share than the other classes of common stock.
CHAPTER 9
STOCKS AND THEIR VALUATION
Page 2 Conceptual M/C Chapter 9: Stocks
a. True
b. False
6. The total return on a share of stock refers to the dividend yield less
any commissions paid when the stock is purchased and sold.
a. True
b. False
7. The cash flows associated with common stock are more difficult to
estimate than those related to bonds because stock has a residual claim
against the company versus a contractual obligation for a bond.
a. True
b. False
8. According to the basic DCF stock valuation model, the value an investor
should assign to a share of stock is dependent on the length of time he
or she plans to hold the stock.
a. True
b. False
9. When a new issue of stock is brought to market, it is the marginal
investor who determines the price at which the stock will trade.
a. True
b. False
10. The constant growth DCF model used to evaluate the prices of common
stocks is conceptually similar to the model used to find the price of
perpetual preferred stock or other perpetuities.
a. True
b. False
11. According to the nonconstant growth model discussed in the textbook,
the discount rate used to find the present value of the expected cash
flows during the initial growth period is the same as the discount rate
used to find the PVs of cash flows during the subsequent constant
growth period.
a. True
b. False
12. The corporate valuation model can be used only when a company doesn’t
Chapter 9: Stocks Conceptual M/C Page 3
pay dividends.
a. True
b. False
13. The corporate valuation model cannot be used unless a company pays
dividends.
a. True
b. False
14. Projected free cash flows should be discounted at the firm’s weighted
average cost of capital to find the firm’s total corporate value.
a. True
b. False
15. Preferred stock is a hybrid–a sort of cross between a common stock and
a bond–in the sense that it pays dividends that normally increase
annually like a stock but its payments are contractually guaranteed
like interest on a bond.
a. True
b. False
16. From an investor’s perspective, a firm’s preferred stock is generally
considered to be less risky than its common stock but more risky than
its bonds. However, from a corporate issuer’s standpoint, these risk
relationships are reversed: bonds are the most risky for the firm,
preferred is next, and common is least risky.
a. True
b. False
Multiple Choice: Conceptual
Some of the questions require calculations.
17. Which of the following statements is CORRECT?
a. The constant growth model is often appropriate for evaluating start–
up companies that do not have a stable history of growth but are
expected to reach stable growth within the next few years.
b. If a stock has a required rate of return rs = 12% and its dividend is
expected to grow at a constant rate of 5%, this implies that the
stock’s dividend yield is also 5%.
Page 4 Conceptual M/C Chapter 9: Stocks
c. The stock valuation model, P0 = D1/(rs – g), can be used to value
firms whose dividends are expected to decline at a constant rate,
i.e., to grow at a negative rate.
d. The price of a stock is the present value of all expected future
dividends, discounted at the dividend growth rate.
e. The constant growth model cannot be used for a zero growth stock,
where the dividend is expected to remain constant over time.
18. An increase in a firm’s expected growth rate would cause its required
rate of return to
a. increase.
b. decrease.
c. fluctuate less than before.
d. fluctuate more than before.
e. possibly increase, possibly decrease, or possibly remain constant.
19. If in the opinion of a given investor a stock’s expected return exceeds
its required return, this suggests that the investor thinks
a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price per share.
e. dividends are not likely to be declared.
20. The preemptive right is important to shareholders because it
a. allows managers to buy additional shares below the current market
price.
b. will result in higher dividends per share.
c. is included in every corporate charter.
d. protects the current shareholders against a dilution of their
ownership interests.
e. protects bondholders, and thus enables the firm to issue debt with a
relatively low interest rate.
21. Companies can issue different classes of common stock. Which of the
following statements concerning stock classes is CORRECT?
a. All common stocks fall into one of three classes: A, B, and C.
b. All common stocks, regardless of class, must have the same voting
rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same dividend.
e. Some class or classes of common stock are entitled to more votes per
share than other classes.
Chapter 9: Stocks Conceptual M/C Page 5
22. Stocks A and B have the following data. Assuming the stock market is
efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%
a. These two stocks should have the same price.
b. These two stocks must have the same dividend yield.
c. These two stocks should have the same expected return.
d. These two stocks must have the same expected capital gains yield.
e. These two stocks must have the same expected year-end dividend.
23. Stocks A and B have the following data. Assuming the stock market is
efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
A B
Price $25 $40
Expected growth 7% 9%
Expected return 10% 12%
a. The two stocks should have the same expected dividend.
b. The two stocks could not be in equilibrium with the numbers given in
the question.
c. A’s expected dividend is $0.50.
d. B’s expected dividend is $0.75.
e. A’s expected dividend is $0.75 and B’s expected dividend is $1.20.
24. Stocks A and B have the same price and are in equilibrium, but Stock A
has the higher required rate of return. Which of the following
statements is CORRECT?
a. If Stock A has a lower dividend yield than Stock B, its expected
capital gains yield must be higher than Stock B’s.
b. Stock B must have a higher dividend yield than Stock A.
c. Stock A must have a higher dividend yield than Stock B.
d. If Stock A has a higher dividend yield than Stock B, its expected
capital gains yield must be lower than Stock B’s.
e. Stock A must have both a higher dividend yield and a higher capital
gains yield than Stock B.
Page 6 Conceptual M/C Chapter 9: Stocks
25. Two constant growth stocks are in equilibrium, have the same price, and
have the same required rate of return. Which of the following
statements is CORRECT?
a. The two stocks must have the same dividend per share.
b. If one stock has a higher dividend yield, it must also have a lower
dividend growth rate.
c. If one stock has a higher dividend yield, it must also have a higher
dividend growth rate.
d. The two stocks must have the same dividend growth rate.
e. The two stocks must have the same dividend yield.
26. Which of the following statements is CORRECT, assuming stocks are in
equilibrium?
a. The dividend yield on a constant growth stock must equal its expected
total return minus its expected capital gains yield.
b. Assume that the required return on a given stock is 13%. If the
stock’s dividend is growing at a constant rate of 5%, its expected
dividend yield is 5% as well.
c. A stock’s dividend yield can never exceed its expected growth rate.
d. A required condition for one to use the constant growth model is that
the stock’s expected growth rate exceeds its required rate of
return.
e. Other things held constant, the higher a company’s beta coefficient,
the lower its required rate of return.
27. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 =
$2.00. The dividend is expected to decline at a rate of 5% a year
forever (g = -5%). If the company is in equilibrium and its expected
and required rate of return is 15%, which of the following statements
is CORRECT?
a. The company’s current stock price is $20.
b. The company’s dividend yield 5 years from now is expected to be 10%.
c. The constant growth model cannot be used because the growth rate is
negative.
d. The company’s expected capital gains yield is 5%.
e. The company’s expected stock price at the beginning of next year is
$9.50.
Chapter 9: Stocks Conceptual M/C Page 7
28. Which of the following statements is CORRECT?
a. The constant growth model takes into consideration the capital gains
investors expect to earn on a stock.
b. Two firms with the same expected dividend and growth rate must also
have the same stock price.
c. It is appropriate to use the constant growth model to estimate a
stock’s value even if its growth rate is never expected to become
constant.
d. If a stock has a required rate of return rs = 12%, and if its
dividend is expected to grow at a constant rate of 5%, this implies
that the stock’s dividend yield is also 5%.
e. The price of a stock is the present value of all expected future
dividends, discounted at the dividend growth rate.
29. If a stock’s dividend is expected to grow at a constant rate of 5% a
year, which of the following statements is CORRECT? The stock is in
equilibrium.
a. The expected return on the stock is 5% a year.
b. The stock’s dividend yield is 5%.
c. The price of the stock is expected to decline in the future.
d. The stock’s required return must be equal to or less than 5%.
e. The stock’s price one year from now is expected to be 5% above the
current price.
30. Stocks A and B have the following data. Assuming the stock market is
efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
A B
Price $25 $25
Expected growth (constant) 10% 5%
Required return 15% 15%
a. Stock A’s expected dividend at t = 1 is only half that of Stock B.
b. Stock A has a higher dividend yield than Stock B.
c. Currently the two stocks have the same price, but over time Stock
B’s price will pass that of A.
d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s
future dividends will always be twice as high as Stock B’s.
e. The two stocks should not sell at the same price. If their prices
are equal, then a disequilibrium must exist.
Page 8 Conceptual M/C Chapter 9: Stocks
31. Stocks X and Y have the following data. Assuming the stock market is
efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
X Y
Price $30 $30
Expected growth (constant) 6% 4%
Required return 12% 10%
a. Stock X has a higher dividend yield than Stock Y.
b. Stock Y has a higher dividend yield than Stock X.
c. One year from now, Stock X’s price is expected to be higher than
Stock Y’s price.
d. Stock X has the higher expected year-end dividend.
e. Stock Y has a higher capital gains yield.
32. Stock X has the following data. Assuming the stock market is efficient
and the stock is in equilibrium, which of the following statements is
CORRECT?
Expected dividend, D1 $3.00
Current Price, P0 $50
Expected constant growth rate 6.0%
a. The stock’s required return is 10%.
b. The stock’s expected dividend yield and growth rate are equal.
c. The stock’s expected dividend yield is 5%.
d. The stock’s expected capital gains yield is 5%.
e. The stock’s expected price 10 years from now is $100.00.
33. Stocks X and Y have the following data. Assuming the stock market is
efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
X Y
Price $25 $25
Expected dividend yield 5% 3%
Required return 12% 10%
a. Stock Y pays a higher dividend per share than Stock X.
b. Stock X pays a higher dividend per share than Stock Y.
c. One year from now, Stock X should have the higher price.
d. Stock Y has a lower expected growth rate than Stock X.
e. Stock Y has the higher expected capital gains yield.
Chapter 9: Stocks Conceptual M/C Page 9
34. The expected return on Natter Corporation’s stock is 14%. The stock’s
dividend is expected to grow at a constant rate of 8%, and it currently
sells for $50 a share. Which of the following statements is CORRECT?
a. The stock’s dividend yield is 7%.
b. The stock’s dividend yield is 8%.
c. The current dividend per share is $4.00.
d. The stock price is expected to be $54 a share one year from now.
e. The stock price is expected to be $57 a share one year from now.
(9-5) Constant growth model and CAPM C G Answer: b MEDIUM
35. Stocks A and B have the following data. The market risk premium is 6.0%
and the risk-free rate is 6.4%. Assuming the stock market is efficient
and the stocks are in equilibrium, which of the following statements is
CORRECT?
A B
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%
a. Stock A must have a higher stock price than Stock B.
b. Stock A must have a higher dividend yield than Stock B.
c. Stock B’s dividend yield equals its expected dividend growth rate.
d. Stock B must have the higher required return.
e. Stock B could have the higher expected return.
36. Which of the following statements is NOT CORRECT?
a. The corporate valuation model can be used both for companies that pay
dividends and those that do 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 firm’s pro forma financial statements.
e. Free cash flows are assumed to grow at a constant rate beyond a
specified date in order to find the horizon, or continuing, value.
37. Which of the following statements is CORRECT?
a. To implement the corporate valuation model, we discount projected
free cash flows at the weighted average cost of capital.
b. To implement the corporate valuation model, we discount net
operating profit after taxes (NOPAT) at the weighted average cost of
capital.
c. To implement the corporate valuation model, we discount projected
net income at the weighted average cost of capital.
d. To implement the corporate valuation model, we discount projected
free cash flows at the cost of equity capital.
e. The corporate valuation model requires the assumption of a constant
growth rate in all years.
Page 10 Conceptual M/C Chapter 9: Stocks
38. Which of the following statements is CORRECT?
a. Preferred stockholders have a priority over bondholders in the event
of bankruptcy to the income, but not to the proceeds in a
liquidation.
b. The preferred stock of a given firm is generally less risky to
investors than the same firm’s common stock.
c. Corporations cannot buy the preferred stocks of other corporations.
d. Preferred dividends are not generally cumulative.
e. A big advantage of preferred stock is that dividends on preferred
stocks are tax deductible by the issuing corporation.
39. Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that
preferred stockholders typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more
reliable income to investors than the same firm’s common stock, and,
as a result, the expected after-tax yield on the preferred is lower
than the after-tax expected return on the common stock.
c. The preemptive right is a provision in all corporate charters that
gives preferred stockholders the right to purchase (on a pro rata
basis) new issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock
is that 70% of the dividends received represent taxable income to
the corporate recipient, whereas interest income earned on bonds
would be tax free.
e. One of the advantages to financing with preferred stock is that 70%
of the dividends paid out are tax deductible to the issuer.
40. Which of the following statements is CORRECT?
a. If a company has two classes of common stock, Class A and Class B,
the stocks may pay different dividends, but under all state charters
the two classes must have the same voting rights.
b. The preemptive right gives stockholders the right to approve or
disapprove of a merger between their company and some other company.
c. The preemptive right is a provision in the corporate charter that
gives common stockholders the right to purchase (on a pro rata
basis) new issues of the firm’s common stock.
d. The stock valuation model, P0 = D1/(rs – g), cannot be used for firms
that have negative growth rates.
e. The stock valuation model, P0 = D1/(rs – g), can be used only for
firms whose growth rates exceed their required return.
Chapter 9: Stocks M/C Problems Page 11
41. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which
of the following statements is CORRECT?
a. If the market is in equilibrium, and if Stock Y has the lower
expected dividend yield, then it must have the higher expected
growth rate.
b. If Stock Y and Stock X have the same dividend yield, then Stock Y
must have a lower expected capital gains yield than Stock X.
c. If Stock X and Stock Y have the same current dividend and the same
expected dividend growth rate, then Stock Y must sell for a higher
price.
d. The stocks must sell for the same price.
e. Stock Y must have a higher dividend yield than Stock X.
Multiple Choice: Problems
Most of these problems are straightforward and only moderately difficult. However, a few of the
later ones are relatively difficult and should be used primarily on take-home exams for students
with some experience with Excel. Problems with * in the topic line are nonalgorithmic.
42. A stock is expected to pay a dividend of $0.75 at the end of the year.
The required rate of return is rs = 10.5%, and the expected constant
growth rate is g = 6.4%. What is the stock’s current price?
a. $17.39
b. $17.84
c. $18.29
d. $18.75
e. $19.22
43. A stock just paid a dividend of D0 = $1.50. The required rate of return
is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the
current stock price?
a. $23.11
b. $23.70
c. $24.31
d. $24.93
e. $25.57
44. A share of common stock just paid a dividend of $1.00. If the expected
long-run growth rate for this stock is 5.4%, and if investors’ required
rate of return is 11.4%, what is the stock price?
a. $16.28
b. $16.70
c. $17.13
d. $17.57
e. $18.01
Page 12 M/C Problems Chapter 9: Stocks
45. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is
the stock’s expected dividend yield for the coming year?
a. 4.12%
b. 4.34%
c. 4.57%
d. 4.81%
e. 5.05%
46. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the
stock’s expected dividend yield for the coming year?
a. 4.42%
b. 4.66%
c. 4.89%
d. 5.13%
e. 5.39%
47. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the
stock’s expected capital gains yield for the coming year?
a. 6.50%
b. 6.83%
c. 7.17%
d. 7.52%
e. 7.90%
48. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the
stock’s expected total return for the coming year?
a. 7.54%
b. 7.73%
c. 7.93%
d. 8.13%
e. 8.34%
49. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is
the stock’s expected total return for the coming year?
a. 8.37%
b. 8.59%
c. 8.81%
d. 9.03%
e. 9.27%
Chapter 9: Stocks M/C Problems Page 13
50. Gay Manufacturing is expected to pay a dividend of $1.25 per share at
the end of the year (D1 = $1.25). The stock sells for $32.50 per share,
and its required rate of return is 10.5%. The dividend is expected to
grow at some constant rate, g, forever. What is the equilibrium
expected growth rate?
a. 6.01%
b. 6.17%
c. 6.33%
d. 6.49%
e. 6.65%
51. Reddick Enterprises’ stock currently sells for $35.50 per share. The
dividend is projected to increase at a constant rate of 5.50% per year.
The required rate of return on the stock, rs, is 9.00%. What is the
stock’s expected price 3 years from today?
a. $37.86
b. $38.83
c. $39.83
d. $40.85
e. $41.69
52. Whited Inc.’s stock currently sells for $35.25 per share. The dividend
is projected to increase at a constant rate of 4.75% per year. The
required rate of return on the stock, rs, is 11.50%. What is the
stock’s expected price 5 years from now?
a. $40.17
b. $41.20
c. $42.26
d. $43.34
e. $44.46
53. Mooradian Corporation’s free cash flow during the just-ended year (t =
0) was $150 million, and its FCF is expected to grow at a constant rate
of 5.0% in the future. If the weighted average cost of capital is
12.5%, what is the firm’s total corporate value, in millions?
a. $1,895
b. $1,995
c. $2,100
d. $2,205
e. $2,315
Page 14 M/C Problems Chapter 9: Stocks
54. Suppose Boyson Corporation’s projected free cash flow for next year is
FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%.
If the company’s weighted average cost of capital is 11.5%, what is the
firm’s total corporate value?
a. $2,572,125
b. $2,707,500
c. $2,850,000
d. $3,000,000
e. $3,150,000
55. Molen Inc. has an outstanding issue of perpetual preferred stock with
an annual dividend of $7.50 per share. If the required return on this
preferred stock is 6.5%, at what price should the stock sell?
a. $104.27
b. $106.95
c. $109.69
d. $112.50
e. $115.38
56. The Francis Company is expected to pay a dividend of D1 = $1.25 per
share at the end of the year, and that dividend is expected to grow at
a constant rate of 6.00% per year in the future. The company’s beta is
1.15, the market risk premium is 5.50%, and the risk-free rate is
4.00%. What is the company’s current stock price?
a. $28.90
b. $29.62
c. $30.36
d. $31.12
e. $31.90
57. The Isberg Company just paid a dividend of $0.75 per share, and that
dividend is expected to grow at a constant rate of 5.50% per year in the
future. The company’s beta is 1.15, the market risk premium is 5.00%,
and the risk-free rate is 4.00%. What is the company’s current stock
price, P0?
a. $18.62
b. $19.08
c. $19.56
d. $20.05
e. $20.55
Chapter 9: Stocks M/C Problems Page 15
58. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share,
and that dividend is expected to grow at a constant rate of 6.50% per
year in the future. The company’s beta is 1.25, the required return on
the market is 10.50%, and the risk-free rate is 4.50%. What is the
company’s current stock price?
a. $14.52
b. $14.89
c. $15.26
d. $15.64
59. Goode Inc.’s stock has a required rate of return of 11.50%, and it
sells for $25.00 per share. Goode’s dividend is expected to grow at a
constant rate of 7.00%. What was the last dividend, D0?
a. $0.95
b. $1.05
c. $1.16
d. $1.27
e. $1.40
60. Francis Inc.’s stock has a required rate of return of 10.25%, and it
sells for $57.50 per share. The dividend is expected to grow at a
constant rate of 6.00% per year. What is the expected year-end
dividend, D1?
a. $2.20
b. $2.44
c. $2.69
d. $2.96
e. $3.25
61. Sorenson Corp.’s expected year–end dividend is D1 = $1.60, its required
return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate
is expected to be constant in the future. What is Sorenson’s expected
stock price in 7 years, i.e., what is
7
P
ˆ
?
a. $37.52
b. $39.40
c. $41.37
d. $43.44
e. $45.61
Page 16 M/C Problems Chapter 9: Stocks
62. Gupta Corporation is undergoing a restructuring, and its free cash
flows are expected to vary considerably during the next few years.
However, the FCF is expected to be $65.00 million in Year 5, and the
FCF growth rate is expected to be a constant 6.5% beyond that point.
The weighted average cost of capital is 12.0%. What is the horizon (or
continuing) value (in millions) at t = 5?
a. $1,025
b. $1,079
c. $1,136
d. $1,196
e. $1,259
63. Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e.,
at t = 3, and it expects FCF to grow at a constant rate of 5.5%
thereafter. If the weighted average cost of capital (WACC) is 10.0%
and the cost of equity is 15.0%, what is the horizon, or continuing,
value in millions at t = 3?
a. $821
b. $862
c. $905
d. $950
e. $997
64. You must estimate the intrinsic value of Noe Technologies’ stock. The
end-of-year free cash flow (FCF1) is expected to be $27.50 million, and
it is expected to grow at a constant rate of 7.0% a year thereafter.
The company’s WACC is 10.0%, it has $125.0 million of long-term debt
plus preferred stock outstanding, and there are 15.0 million shares of
common stock outstanding. What is the firm’s estimated intrinsic value
per share of common stock?
a. $48.64
b. $50.67
c. $52.78
d. $54.89
e. $57.08
65. You have been assigned the task of using the corporate, or free cash
flow, model to estimate Petry Corporation’s intrinsic value. The
firm’s WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected
to be $75.0 million, the FCFs are expected to grow at a constant rate
of 5.00% a year in the future, the company has $200 million of long–
term debt and preferred stock, and it has 30 million shares of common
stock outstanding. What is the firm’s estimated intrinsic value per
share of common stock?
a. $40.35
b. $41.82
c. $43.33
Chapter 9: Stocks M/C Problems Page 17
d. $44.85
e. $46.42
66. Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1
= -$10 million, but it expects positive numbers thereafter, with FCF2 =
$25 million. After Year 2, FCF is expected to grow at a constant rate
of 4% forever. If the weighted average cost of capital is 14.0%, what
is the firm’s total corporate value, in millions?
a. $200.00
b. $210.53
c. $221.05
d. $232.11
e. $243.71
67. Kale Inc. forecasts the free cash flows (in millions) shown below. If
the weighted average cost of capital is 11.0% and FCF is expected to
grow at a rate of 5.0% after Year 2, what is the firm’s total corporate
value, in millions?
Year 1 2
Free cash flow –$50 $100
a. $1,456
b. $1,529
c. $1,606
d. $1,686
e. $1,770
68. Ryan Enterprises forecasts the free cash flows (in millions) shown
below. 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?
Year 1 2 3
FCF –$15.0 $10.0 $40.0
a. $314.51
b. $331.06
c. $348.48
d. $366.82
e. $386.13
69. Based on the corporate valuation model, Wang Inc.’s total corporate
value is $750 million. Its balance sheet shows $100 million 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?
a. $386
b. $406
Page 18 M/C Problems Chapter 9: Stocks
c. $428
d. $450
e. $473
70. Based on the corporate valuation model, Gay Entertainment’s total
corporate value is $1,200 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. $21.90
b. $24.33
c. $26.77
d. $29.44
e. $32.39
71. Based on the corporate valuation model, the total corporate value of
Chen Lin Inc. is $900 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. $22.03
b. $24.48
c. $27.20
d. $29.92
e. $32.91
72. Based on the corporate valuation model, Morgan Inc.’s total corporate
value is $300 million. The balance sheet shows $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?
a. $12.00
b. $12.64
c. $13.30
d. $14.00
e. $14.70
73. Carter’s preferred stock pays a dividend of $1.00 per quarter. If the
price of the stock is $45.00, what is its nominal (not effective)
annual rate of return?
a. 8.03%
b. 8.24%