CHAPTER 09—STOCKS AND THEIR VALUATION
73. 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
$1,456
$1,529
$1,606
$1,686
$1,770
a
MODERATE
9-7 Enterprise-Based Approach to Valuation
FOFM.BRIG.16.09.07 – Enterprise-Based Approach to Valuation
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Corporate valuation model
MODERATE
9-7 Enterprise-Based Approach to Valuation
FOFM.BRIG.16.09.07 – Enterprise-Based Approach to Valuation
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Corporate valuation model
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 09—STOCKS AND THEIR VALUATION
74. 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
$314.51
$331.06
$348.48
$366.82
$386.13
e
MODERATE
75. 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?
$386
$406
$428
$450
$473
CHAPTER 09—STOCKS AND THEIR VALUATION
76. 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?
$21.90
$24.33
$26.77
$29.44
$32.39
MODERATE
9-7 Enterprise-Based Approach to Valuation
FOFM.BRIG.16.09.07 – Enterprise-Based Approach to Valuation
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Corporate valuation model
Bloom’s: Analysis
Multiple Choice: Problem
77. 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?
MODERATE
9-7 Enterprise-Based Approach to Valuation
FOFM.BRIG.16.09.07 – Enterprise-Based Approach to Valuation
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Corporate valuation model
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 09—STOCKS AND THEIR VALUATION
$22.03
$24.48
$27.20
$29.92
$32.91
c
MODERATE
78. 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?
$12.00
$12.64
$13.30
$14.00
$14.70
MODERATE
CHAPTER 09—STOCKS AND THEIR VALUATION
79. 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?
8.03%
8.24%
8.45%
8.67%
8.89%
e
MODERATE
80. Rebello’s preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective
annual (not nominal) rate of return?
6.62%
6.82%
7.03%
7.25%
7.47%
e
MODERATE
CHAPTER 09—STOCKS AND THEIR VALUATION
81. Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company’s dividend to grow by 30% this
year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is
9.00%. What is the best estimate of the stock’s current market value?
$41.59
$42.65
$43.75
$44.87
$45.99
82. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product.
Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will
probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25,
its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the
common stock?
$26.77
$27.89
$29.05
$30.21
$31.42
c
CHAPTER 09—STOCKS AND THEIR VALUATION
83. The Ramirez Company’s last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2
years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best
estimate of the current stock price?
$41.58
$42.64
$43.71
$44.80
$45.92
CHALLENGING
CHALLENGING
CHAPTER 09—STOCKS AND THEIR VALUATION
84. Ackert Company’s last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years,
after which dividends are expected to grow at a rate of 8.0% forever. The firm’s required return (rs) is 12.0%. What is the
best estimate of the current stock price?
$37.05
$38.16
$39.30
$40.48
$41.70
a
CHALLENGING
85. Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15% 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?
$30.57
$31.52
$32.49
$33.50
$34.50
CHAPTER 09—STOCKS AND THEIR VALUATION
CHALLENGING
9-6 Valuing Nonconstant Growth Stocks
FOFM.BRIG.16.09.06 – Valuing Nonconstant Growth Stocks
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
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Nonconstant growth valuation
Bloom’s: Analysis
Multiple Choice: Problem
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?
Year
0
1
2
3
4
5
6
Growth rate
NA
NA
NA
NA
50.00%
25.00%
8.00%
Dividends
$0.000
$0.000
$0.000
$0.250
$0.375
$0.469
$0.506
$ 9.94
$10.19
$10.45
$10.72
$10.99
CHALLENGING
9-6 Valuing Nonconstant Growth Stocks
FOFM.BRIG.16.09.06 – Valuing Nonconstant Growth Stocks
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Nonconstant growth valuation
Bloom’s: Analysis
CHAPTER 09—STOCKS AND THEIR VALUATION
OTHER:
Multiple Choice: Problem
87. Savickas Petroleum’s stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a
dividend of $1.00, and the dividend is expected to grow by 30% 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?
5.17%
5.44%
5.72%
6.02%
6.34%
ANSWER:
e
POINTS:
DIFFICULTY:
CHALLENGING
REFERENCES:
9-6 Valuing Nonconstant Growth Stocks
FOFM.BRIG.16.09.06 – Valuing Nonconstant Growth Stocks
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
TOPICS:
Nonconstant growth rate–nonalgorithmic
KEYWORDS:
Bloom’s: Analysis
OTHER:
Multiple Choice: Problem
88. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic
value of the company’s stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share. Sally asked
a number of security analysts what they believe FCE’s future dividends will be, based on their analysis of the company.
The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5%
per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the
stock, rs, and she provided you with the following template for use in the analysis.
Estimated rs =
100%
(must be changed to force Calculated Price to equal
the Actual Market Price)
CHAPTER 09—STOCKS AND THEIR VALUATION
Actual Market Price, P0:
$15.00
Rapid growth
Normal growth
Year
0
1
2
3
4
5
Dividend growth rate (insert correct values)
10%
10%
10%
5%
5%
Calculated dividends (D0 has been paid)
$1.00
?
?
?
?
?
HV3 = P3 = D4/(rs – g4). Find using Estimated rs.
?
Total CFs
?
?
?
PVs of CFs when discounted at Estimated rs
?
?
?
Calculated Price = P0 = Sum of PVs =
$0.00
A positive number will be here when dividends
are estimated.
The Calculated Price will equal the Actual Market
Price once the correct rs has been found.
Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the
analysts’ forecasted rates to get the correct forecasted dividends and then the estimated HV. She also notes that the
estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause
the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the
correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs
that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error
process would be 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?
11.84%
12.21%
12.58%
12.97%
13.36%
CHAPTER 09—STOCKS AND THEIR VALUATION
←
Click OK to cause the target to go to $15 and also find the
value of rs.
CHALLENGING
9-6 Valuing Nonconstant Growth Stocks
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Nonconstant valuation–use Excel–nonalgorithmic
Bloom’s: Analysis
Multiple Choice: Problem
89. Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of
capital is 14% 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 firm’s total corporate value, in millions?
Year
1
2
3
Free cash flow
−$20.00
$48.00
$54.00
$2,650.00
$2,789.47
$2,928.95
$3,075.39
$3,229.16
CHALLENGING
9-7 Enterprise-Based Approach to Valuation
FOFM.BRIG.16.09.07 – Enterprise-Based Approach to Valuation
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Corporate valuation model
Bloom’s: Analysis
Multiple Choice: Problem