CHAPTER 8—BASIC STOCK VALUATION
72. Connor Publishing’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?
a.
6.62%
b.
6.82%
c.
7.03%
d.
7.25%
e.
7.47%
e
73. Burke Tires 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?
a.
$41.59
b.
$42.65
c.
$43.75
d.
$44.87
e.
$45.99
CHAPTER 8—BASIC STOCK VALUATION
74. Decker Tires’ free cash flow was just FCF0 = $1.32. Analysts expect the company’s free cash flow to grow by 30%
this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%.
Decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding. What is the best
estimate of the stock’s current intrinsic price?
a.
$31.59
b.
$32.65
c.
$33.75
d.
$34.87
e.
$35.99
Difficulty: Moderate
INTE.GENE.16.57 – LO: 8-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Nonconstant FCF growth valuation
TYPE: Multiple Choice: Problem
75. Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be −$10 million, but its FCF at t = 2
will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost
Difficulty: Moderate
INTE.GENE.16.55 – LO: 8-11
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Nonconstant dividend growth valuation
TYPE: Multiple Choice: Problem
CHAPTER 8—BASIC STOCK VALUATION
of capital is 14%, what is the firm’s value of operations, in millions?
a.
$158
b.
$167
c.
$175
d.
$184
e.
$193
Difficulty: Moderate
INTE.GENE.16.57 – LO: 8-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Free cash flow valuation model, value of operations
TYPE: Multiple Choice: Problem
76. The free cash flows (in millions) shown below are forecast by Parker & Sons. If the weighted average cost of capital is
11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions?
Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
Year:
Free cash flow:
a.
$1,456
b.
$1,529
c.
$1,606
d.
$1,686
e.
$1,770
a
CHAPTER 8—BASIC STOCK VALUATION
77. Heath and Logan Inc. forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is
13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to
remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?
Year:
3
Free cash flow:
$40
a.
$315
b.
$331
c.
$348
d.
$367
e.
$386
e
Difficulty: Moderate
INTE.GENE.16.57 – LO: 8-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
free cash flow valuation model, value of operations
TYPE: Multiple Choice: Problem
78. Reynolds Construction’s value of operations is $750 million based on the free cash flow valuation model. Its balance
sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable,
$100 million of 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.
$429
Difficulty: Moderate
INTE.GENE.16.57 – LO: 8-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
free cash flow valuation model, value of operations
TYPE: Multiple Choice: Problem
CHAPTER 8—BASIC STOCK VALUATION
b.
$451
c.
$475
d.
$500
e.
$525
79. Based on the free cash flow valuation model, the value of Weidner Co.’s operations is $1,200 million. The company’s
balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term
investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million
in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and
$800 million in total common equity. If Weidner has 30 million shares of stock outstanding, what is the best estimate of
the stock’s price per share?
a.
$24.90
b.
$27.67
c.
$30.43
d.
$33.48
e.
$36.82
CHAPTER 8—BASIC STOCK VALUATION
80. The value of Broadway-Brooks Inc.’s operations is $900 million, based on the free cash flow valuation model. Its
balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments
that are unrelated to operations, $20 million in accounts payable, $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 the stock’s price per share?
a.
$23.00
b.
$25.56
c.
$28.40
d.
$31.24
e.
$34.36
c
CHAPTER 8—BASIC STOCK VALUATION
81. Based on the free cash flow valuation model, Bizzaro Co.’s value of operations is $300 million. The balance sheet
shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million
of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity.
Bizzaro has 10 million shares of stock outstanding. What is the best estimate of the stock’s price per share?
a.
$13.72
b.
$14.44
c.
$15.20
d.
$16.00
e.
$16.80
CHAPTER 8—BASIC STOCK VALUATION
82. McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate
in earnings and dividends will fall 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?
a.
$26.77
b.
$27.89
c.
$29.05
d.
$30.21
e.
$31.42
c
83. Orwell Building Supplies’ 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?
a.
$41.58
b.
$42.64
c.
$43.71
d.
$44.80
e.
$45.92
CHAPTER 8—BASIC STOCK VALUATION
84. Huxley Building Supplies’ last free cash flow was $1.75 million. Its free cash flow growth rate is expected to be
constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. Its weighted average
cost of capital WACC is 12%. Huxley has $5 million in short-term investments and $7 million in debt and has 1 million
shares outstanding. What is the best estimate of the current intrinsic stock price?
a.
$39.58
b.
$40.64
c.
$41.71
d.
$42.80
e.
$44.92
CHAPTER 8—BASIC STOCK VALUATION
85. The last dividend paid by Wilden Corporation 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?
a.
$37.05
b.
$38.16
c.
$39.30
d.
$40.48
e.
$41.70
a
86. Atchley Corporation’s last free cash flow was $1.55 million. The free cash flow growth rate is expected to be constant
at 1.5% for 2 years, after which free cash flows are expected to grow at a rate of 8.0% forever. The firm’s weighted
average cost of capital (WACC) is 12.0%. Atchley has $2 million in short-term debt and $14 million in debt and 1 million
shares outstanding. What is the best estimate of the intrinsic stock price?
a.
$25.05
CHAPTER 8—BASIC STOCK VALUATION
b.
$26.16
c.
$27.30
d.
$28.48
e.
$29.70
a
87. The last dividend paid by Coppard Inc. 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?
a.
$30.57
b.
$31.52
c.
$32.49
d.
$33.50
e.
$34.50
CHAPTER 8—BASIC STOCK VALUATION
Difficulty: Challenging
INTE.GENE.16.55 – LO: 8-11
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Nonconstant dividend growth valuation
88. Sawchuck Consulting has been profitable for the last 5 years, but it 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
a.
$9.94
b.
$10.19
c.
$10.45
d.
$10.72
e.
$10.99
Difficulty: Challenging
INTE.GENE.16.55 – LO: 8-11
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Nonconstant dividend growth valuation
TYPE: Multiple Choice: Problem
CHAPTER 8—BASIC STOCK VALUATION
89. The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is
13% 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 Year 0 value of operations, in millions?
Year:
3
Free cash flow:
$45
a.
$586
b.
$617
c.
$648
d.
$680
e.
$714
Difficulty: Challenging
INTE.GENE.16.57 – LO: 8-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Free cash flow valuation model, value of operations
TYPE: Multiple Choice: Problem
90. The required return for Williamson Heating’s stock is 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?
a.
5.17%
b.
5.44%
c.
5.72%
d.
6.02%
e.
6.34%
e
TYPE: Multiple Choice: Problem
CHAPTER 8—BASIC STOCK VALUATION
91. Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE). She 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.
Julia 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. Julia 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:
Julia 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 TV. 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
Difficulty: Challenging
INTE.GENE.16.55 – LO: 8-11
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Nonconstant dividend growth rate–nonalgorithmic
TYPE: Multiple Choice: Problem
CHAPTER 8—BASIC STOCK VALUATION
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?
a.
11.84%
b.
12.21%
c.
12.58%
d.
12.97%
e.
13.36%