Investments & Securities Chapter 18 the present value of growth opportunities

92.

For most firms, P/E ratios and risk

93.

Dividend discount models and P/E ratios are used by __________ to try to find mispriced

securities.

94.

Which of the following is the best measure of the floor for a stock price?

95.

Who popularized the dividend discount model, which is sometimes referred to by his

name?

96.

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends

will be _______ now and _______ in the future than a firm that follows a high-reinvestment-

rate plan.

97.

The present value of growth opportunities (PVGO) is equal to

I) the difference between a stock’s price and its no-growth value per share.

II) the stock’s price.

III) zero if its return on equity equals the discount rate.

IV) the net present value of favorable investment opportunities.

98.

Low P/E ratios tend to indicate that a company will _______, ceteris paribus.

99.

Earnings management is

100.

A version of earnings management that became common in the 1990s was

101.

GAAP allows

102.

The most appropriate discount rate to use when applying a FCFE valuation model is the

103.

WACC is the most appropriate discount rate to use when applying a ______ valuation

model.

104.

The most appropriate discount rate to use when applying a FCFF valuation model is the

105.

The required rate of return on equity is the most appropriate discount rate to use when

applying a ______ valuation model.

106.

FCF and DDM valuations should be ____________ if the assumptions used are consistent.

107.

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri’s required return

on equity is 12% and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the

intrinsic value of Siri’s shares are

108.

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero’s required

return on equity is 10% and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the

intrinsic value of Zero’s shares are

109.

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See’s

required return on equity is 10.6% and WACC is 9.3%. If FCFE is expected to grow at 6.5%

forever, the intrinsic value of See’s shares are

110.

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI’s

required return on equity is 11.3% and WACC is 9.8%. If FCFE is expected to grow at 7.0%

forever, the intrinsic value of SI’s shares are

111.

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint’s

required return on equity is 10% and WACC is 9%. If FCFE is expected to grow at 8.0%

forever, the intrinsic value of Highpoint’s shares are

112.

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA’s

required return on equity is 13% and WACC is 11.5%. If FCFE is expected to grow at 8.5%

forever, the intrinsic value of SGA’s shares are

113.

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman’s

required return on equity is 11.6% and WACC is 10.4%. If FCFE is expected to grow at 5%

forever, the intrinsic value of Seaman’s shares are

114.

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is

expected to have before-tax cash flow from operations of $750,000 in the coming year.

The firm’s corporate tax rate is 40%. It is expected that $250,000 of operating cash flow

will be invested in new fixed assets. Depreciation for the year will be $125,000. After the

coming year, cash flows are expected to grow at 7% per year. The appropriate market

capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding

debt. The projected free cash flow of F&G Manufacturing Company for the coming year is

115.