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Exam 13: Equity Valuation

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Question 1

Multiple Choice

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Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year.The risk-free rate of return is 6% and the expected return on the market portfolio is 12%.Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now.The beta of Westsyde Tool Company's stock is 1.20.Using a one-period valuation model,the intrinsic value of Westsyde Tool Company stock today is _________.

A) $24.29
B) $27.39
C) $31.13
D) $34.52

E) B) and C)
F) A) and B)

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Question 2

Multiple Choice

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Next year's earnings are estimated to be $6.00.The company plans to reinvest 33% of its earnings at 12%.If the cost of equity is 8%,what is the present value of growth opportunities?

A) $6.00
B) $25.00
C) $44.44
D) $75.00

E) None of the above
F) B) and C)

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B

Question 3

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Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00,a dividend in year 2 of $3.00,and a dividend in year 3 of $4.00.After year 3,dividends are expected to grow at the rate of 7% per year.An appropriate required return for the stock is 12%.Using the multistage DDM,the stock should be worth __________ today.

Brevik Builders has an expected ROE of 25%.Its dividend growth rate will be __________ if it follows a policy of paying 30% of earning in the form of dividends.

A firm increases its dividend plowback ratio.All else equal you know that _____________.

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depends most critically on _______.

What is the present value of growth opportunities for ART?

A firm has PVGO of 0 and a market capitalization rate of 12%.What is the firm's P/E ratio?

Ace Frisbee Corporation produces a good that is very mature in their product life cycles.Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00,a dividend in year 2 of $2.00,and a dividend in year 3 of $1.00.After year 3,dividends are expected to decline at the rate of 2% per year.An appropriate required return for the stock is 8%.Using the multistage DDM,the stock should be worth __________ today.

Generally speaking the higher a firm's ROA the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Flanders,Inc.has expected earnings of $4 per share for next year.The firm's ROE is 8% and its earnings retention ratio is 40%.If the firm's market capitalization rate is 15%,what is the present value of its growth opportunities?

Next year's earnings are estimated to be $5.00.The company plans to reinvest 20% of its earnings at 15%.If the cost of equity is 9%,what is the present value of growth opportunities?

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year.Dividends are expected to decline at the rate of 3% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock of Caribou Gold Mining Corporation has a beta of -0.50.Using the constant growth DDM,the intrinsic value of the stock is _________.

The free cash flow to the firm is reported as $405 million.The interest expense to the firm is $76 million.If the tax rate is 35% and the net debt of the firm increased by $50,what is the free cash flow to the equity holders of the firm?

A firm is expected to produce earnings next year of $3.00 per share.It plans to reinvest 25% of its earnings at 20%.If the cost of equity if 11%,what should be the value of the stock?

Which one of the following statements about market and book value is correct?

A stock is priced at $45 per share.The stock has earnings per share of $3.00 and a market capitalization rate of 14%.What is the stock's PVGO?

In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?

Everything equal,which variable is negatively related to intrinsic value of a company?