Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
190. A firm has a current price of $40 a share, an expected growth rate of 11 percent and expected dividend per share (D1)
of $2. Given its risk, you have a required rate of return for it of 12 percent. Assuming that you expect the stock price to
increase to $42 during the investment period, your expected rate of return and decision would be
a.
10 percent − do not buy
b.
12 percent − do not buy
c.
14 percent − buy
d.
16 percent − buy
e.
18 percent − buy
191. Based on the information provided, calculate the intrinsic value in 2010 of a share of INV Corp. using the FCFF (free
cash flow to the firm) model. For 2010 the FCFF was $30,000, total debt was $20,000, and there were 12000 shares
outstanding. The required rate of return is 9 percent, and the estimated growth rate in FCFF is 6.5 percent.
a.
$104.83
b.
$153.25
c.
$112.50
d.
$94.92
e.
$80.45
192. Based on the information provided, calculate the intrinsic value in 2010 of a share of INV Corp. using the Present
Value of Earnings Model (infinite holding period). For 2010 net income was $250,000, total debt was $50,000, and there
were 206,263 shares outstanding. The required rate of return is 12 percent, and the estimated growth rate in earnings is 5.5
percent.
a.
b.
c.
d.
e.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
193. You are provided with the following information about Javier Corporation. Sales for the year 2010 were $500,000,
and the Net Profit Margin (NPM) was 15 percent. Analysts project sales to grow by 12 percent next year (that is 2011).
However, because of more competition, the NPM is expected to decline by 10 percent for the year 2010. The expected
P/E multiple for the year 2011 is 22. The total number of shares outstanding is 20,000. Use the earnings multiplier model
to calculate the expected price for Javier Corporation in the year 2011.
a.
$74.25
b.
$61.6
c.
$82.5
d.
$83.16
e.
$101.64
Exhibit 9.15
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA
for the firm.
LIFO reserve
60
Net plant, property, and equipment
1325
Other assets
30
Goodwill
325
Accumulated Goodwill amortized
65
PV of Operating leases
140
Tax benefit from interest on expenses
10
Tax benefit from interest on leases
5
Taxes on non-operating income
2
Implied interest on op. lease
9.5
Increase in LIFO reserve
12
Goodwill amortization
15
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Operating profit
550
Income tax expense
215
Net working capital
440
WACC
0.12
194. Refer to Exhibit 9.15. Calculate the adjusted operating profits before taxes.
a.
$586.5
b.
$225.64
c.
$825.23
d.
$831.56
e.
$692.5
195. Refer to Exhibit 9.15. Calculate the cash operating expenses for the firm.
a.
225
b.
228
c.
232
d.
242
e.
252
196. Refer to Exhibit 9.15. Calculate the capital for the firm.
a.
1725
b.
1953
c.
2524
d.
2385
e.
1987
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
197. Refer to Exhibit 9.15. Calculate the dollar cost of capital.
a.
b.
c.
d.
e.
198. The Peterson Company has an FCFF of $1000. The FCFF is expected to grow by 12 percent next year. The cost of
capital is 12 percent, and the level of debt is $5000. The number of shares outstanding is 500. Calculate the firm’s share
price.
a.
b.
c.
d.
e.
199. The Pekay Company has an FCFE of $800. The FCFE is expected to grow by 7 percent next year. The cost of capital
is 7 percent, and the level of debt is $4000. The number of shares outstanding is 700. Calculate the firm’s share price.
a.
b.
c.
d.
e.
Exhibit 9.16
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Rollerball Corporation’s industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/Equity = 2.0
Rollerball Corporation has the following financial statements for year ending 12/31/2008. (000’s omitted)
Sales
5,450
Cost of Goods Sold
3,250
Gross Profit
2,200
Depreciation
820
Operating Expenses
470
Administration Exp.
115
Operating Profit 795
Interest Expense
88
Profit Before Taxes
707
Taxes
247
Net Income
460
Dividends
250
Assets
Liabilities
Cash
100
Notes Payable
850
Accounts Receivable
1,250
Accounts Payable
1,550
Inventory
1,125
Total Current Liab.
2,400
Total Current Assets
2,475
Long Term Debt
425
Net Fixed Assets
1,450
Common Stock
400
Total Assets
3,925
Retained Earnings
700
Total Liab. & Earnings
3,925
200. Refer to Exhibit 9.16. Calculate Rollerball Corporation’s Net Profit Margin.
a.
3.9%
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
8.4%
c.
14.6%
d.
40.4%
e.
41.8%
201. Refer to Exhibit 9.16. Calculate Rollerball Corporation’s Total Asset Turnover.
a.
0.72
b.
0.85
c.
1.39
d.
1.65
e.
2.31
202. Refer to Exhibit 9.16. Calculate Rollerball Corporation’s Total Assets/Equity ratio.
a.
3.57
b.
4.28
c.
5.61
d.
7.35
e.
9.81
203. Refer to Exhibit 9.16. Calculate the return on equity (ROE) for Rollerball Corporation and the Industry.
Rollerball Industry Average
a.
115.0% 67.5%
b.
65.7% 33.0%
c.
41.8% 33.0%
d.
19.1% 15.7%
e.
8.7% 15.7%
204. Refer to Exhibit 9.16. Calculate the sustainable growth rate for Rollerball Corporation.
a.
19.1%
b.
22.7%
c.
27.5%
d.
52.5%
e.
62.5%
205. Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today.
Johnson Company expects a constant growth of 5 percent in dividends forever. The required rate of return for this
company’s common stock is 13 percent. What is the value of one share of common stock?
a.
b.
c.
d.
e.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.17
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Left-Aid Corporation
DPS
$2.45
Total Asset Turnover
3.80
Net Profit Margin
6.50%
EPS
$3.50
Total Assets/Equity
1.60
206. Refer to Exhibit 9.17. What is the Left-Aid Corporation’s return on equity (ROE)?
a.
25.5%
b.
27.4%
c.
29.7%
d.
35.6%
e.
39.5%
207. Refer to Exhibit 9.17. What is Left-Aid Corporation’s expected sustainable growth rate?
a.
11.9%
b.
18.7%
c.
22.1%
d.
27.7%
e.
30.0%
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.18
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Investment
Beta
Analyst’s Estimated Return
Stock X
2.3
15.5%
Stock Y
1.2
13.6%
Market Portfolio
1.0
11.5%
Risk-free rate
4.0%
208. Refer to Exhibit 9.18. What is the required rate of return for Stock X based on the capital asset pricing model
(CAPM)?
a.
15.5%
b.
17.3%
c.
21.3%
d.
26.5%
e.
30.5%
209. Refer to Exhibit 9.18. What is the required rate of return for Stock Y based on the capital asset pricing model
(CAPM)?
a.
11.5%
b.
13.0%
c.
13.6%
d.
14.8%
e.
15.5%
210. Refer to Exhibit 9.18. Based on the analyst’s estimated return and the stocks’ betas the analyst should
a.
sell both Stock X and Stock Y.
b.
sell Stock X and Buy Stock Y.
c.
buy Stock X and Sell Stock Y.
d.
buy both Stock X and Stock Y.
e.
None of these are correct.
211. In Berkshire Hathaway annual reports, Warren Buffet highlights financial tenets that he believes are important.
Which of the following is NOT a financial tenet of Warren Buffet?
a.
focus on return on equity (ROE) not earnings per share (EPS)
b.
calculate owner earnings similar to free cash flow after capital expenditures
c.
high profit margins relative to the industry
d.
Company should create at least one dollar of market value for every dollar retained.
e.
All of these are correct.
212. Which of the following is NOT considered a favorable attribute of firms by Peter Lynch?
a.
Firm’s product is not faddish.
b.
Firm has a sustainable comparative competitive advantage over its rivals.
c.
Firm’s industry or product has market stability.
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
d.
Firm can benefit from cost reductions.
e.
All of these are correct (that is, all of these are considered favorable attributes by Peter Lynch).
213. Which of the following is a business tenet of Warren Buffett?
a.
long-term prospects
b.
resistance to institutional imperative
c.
creation of one dollar of market value for every dollar retained
d.
purchase at discount to intrinsic value
e.
Product is not faddish.
214. Which of the following is a management tenet of Warren Buffett?
a.
long-term prospects
b.
resistance to institutional imperative
c.
creation of one dollar of market value for every dollar retained
d.
purchase at discount to intrinsic value
e.
Product is not faddish.
215. Which of the following is a financial tenet of Warren Buffett?
a.
long-term prospects
b.
resistance to institutional imperative
c.
creation of one dollar of market value for every dollar retained
d.
purchase at discount to intrinsic value
e.
Product is not faddish.
216. Which of the following is a market tenet of Warren Buffett?
a.
long-term prospects
b.
resistance to institutional imperative
c.
creation of one dollar of market value for every dollar retained
d.
purchase at discount to intrinsic value
e.
Product is not faddish.