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Financial Management 2017 - Quiz and Case Study Guides - Corporate Finance, 4e (Berk / DeMarzo) - Quiz - Chapter 9

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 9   Valuing Stocks

 

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 9   Valuing Stocks

 

9.1   The Dividend-Discount Model

 

1) Which of the following is NOT a way that a firm can increase its dividend?

  1. A) By increasing its retention rate
  2. B) By decreasing its shares outstanding
  3. C) By increasing its earnings (net income)
  4. D) By increasing its dividend payout rate

Answer:  A

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

2) Which of the following statements is false regarding profitable and unprofitable growth?

  1. A) If a firm wants to increase its share price, it must cut its dividend and invest more.
  2. B) If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend.
  3. C) A firm can increase its growth rate by retaining more of its earnings.
  4. D) Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.

Answer:  A

Explanation:  A) This will only increase the share price if the reinvested money is invested in positive NPV projects.

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

3) Which of the following statements is FALSE?

  1. A) Estimating dividends, especially for the distant future, is difficult.
  2. B) A firm can only pay out its earnings to investors or reinvest their earnings.
  3. C) Successful young firms often have high initial earnings growth rates.
  4. D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate.

Answer:  D

Explanation:  D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital adjusted by the growth rate.

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

4) Which of the following statements is FALSE?

  1. A) We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.
  2. B) As firms mature, their growth slows to rates more typical of established companies.
  3. C) The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
  4. D) The simplest forecast for the firm's future dividends states that they will grow at a constant rate, g, forever.

Answer:  A

Explanation:  A) A multistage model should be used.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

 

5) Which of the following statements is FALSE?

  1. A) A common approximation is to assume that in the long run, dividends will grow at a constant rate.
  2. B) The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate.
  3. C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends.
  4. D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Answer:  D

Explanation:  D) During periods of high growth, it is not unusual for these firms to retain 100% of their earnings to exploit profitable investment opportunities.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

6) Which of the following statements is FALSE?

  1. A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends.
  2. B) Total return equals earnings multiplied by the dividend payout rate.
  3. C) Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.
  4. D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

Answer:  B

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

7) Which of the following formulas is INCORRECT?

  1. A) g = retention rate × return on new investment
  2. B) Divt= EPSt× Dividend Payout Rate
  3. C) P0=
  4. D) rE= - g

Answer:  D

Explanation:  D) rE =  + g

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

8) Which of the following formulas is INCORRECT?

  1. A) Divt= × Dividend Payout Rate
  2. B) PN=
  3. C) earnings growth rate = retention rate × return on new investment
  4. D) P0= +  + ... +  +  ×

Answer:  B

Explanation:  B) PN =

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

Use the following information to answer the question(s) below.

 

Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in one year, and its expected price right after paying that dividend is $33.

 

9) Rearden's expected dividend yield is closest to:

  1. A) 3.40%
  2. B) 3.65%
  3. C) 4.00%
  4. D) 4.20%

Answer:  C

Explanation:  C) Div yield = 1.20/30 = .04 or 4%

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

10) Rearden's expected capital gains yield is closest to:

  1. A) 4.0%
  2. B) 6.4%
  3. C) 8.2%
  4. D) 10.0%

Answer:  D

Explanation:  D) Div yield = (33 - 30)/30 = .10 or 10%

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

11) Rearden's equity cost of capital is closest to:

  1. A) 4.0%
  2. B) 6.4%
  3. C) 8.2%
  4. D) 14.0%

Answer:  D

Explanation:  D) Equity cost of capital = 1.20/30.00 + (33 - 30)/30 = .04 + .10 = .14

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

12) Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

  1. A) 3.0% and 7.0% respectively.
  2. B) 3.0% and 10.0% respectively.
  3. C) 4.0% and 6.0% respectively.
  4. D) 4.0% and 10.0% respectively.

Answer:  B

Explanation:  B) Dividend Yield = $0.75/$25 = .03 or 3%

Equity cost of capital = 0.75/25.00 + (26.75 - 25.00)/25.00 = .03 + .07 = .10 or 10%

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

13) NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.  If NoGrowth's equity cost of capital is 12%, then the value of a share of NoGrowth's stock is closest to:

  1. A) $10.00
  2. B) $15.00
  3. C) $14.00
  4. D) $12.50

Answer:  D

Explanation:  D) P0 = Div1/(rE - g) = $1.50/(.12 - 0) = $12.50

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

14) Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%, then the value of a share of VBS stock is closest to:

  1. A) $25.00
  2. B) $40.00
  3. C) $15.40
  4. D) $11.10

Answer:  A

Explanation:  A) P0 = Div1/(rE - g) = 2.00/(.13 - .05) = $25.00

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

15) Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.  Luther Industries dividends are expected to grow at a constant rate indefinitely.  The grow rate of Luther's dividends are closest to:

  1. A) 7.5%
  2. B) 5.5%
  3. C) 16.5%
  4. D) 12%

Answer:  A

Explanation:  A) rE = Div1/P0 + g

.12 = .045 + g so g = .075

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

16) The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%.  If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to:

  1. A) 8%
  2. B) 6%
  3. C) 4%
  4. D) 2%

Answer:  C

Explanation:  C) P0 = Div1/(rE - g) = 25.00 = 2.50/(.14 - g) so g = .04

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

17) You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.  KTI's return on new investments is 15% and their equity cost of capital is 12%.  The expected growth rate for KTI's dividends is closest to:

  1. A) 6.0%
  2. B) 7.5%
  3. C) 4.5%
  4. D) 3.0%

Answer:  B

Explanation:  B) g = retention rate × return on new investment

  = (3.00 - 1.50)/3.00 × .15 = .075 or 7.5%

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

18) You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.  KTI's return on new investments is 15% and their equity cost of capital is 12%.  The value of a share of KTI's stock is closest to:

  1. A) $39.25
  2. B) $20.00
  3. C) $33.35
  4. D) $12.50

Answer:  C

Explanation:  C) g = retention rate × return on new investment

  = (3.00 - 1.50)/3.00 × .15 = .075 or 7.5%

P0 = Div1/(rE - g) = 1.50/(.12 - .075) = 33.33

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

19) JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.  Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.  With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely.  Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:

  1. A) $25.00
  2. B) $15.00
  3. C) $31.25
  4. D) $27.50

Answer:  A

Explanation:  A) Two steps.

 

Step #1 solve for rE,

rE = Div1/P0 + g = 2.50/25.00 + .04 = .14 or 14%

 

Step #2

solve for new stock price:

P0 = Div1/(rE - g) = 1.50/(.14 - .08) = 25.00

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

20) You expect that Bean Enterprises will have earnings per share of $2 for the coming year.  Bean plans to retain all of its earnings for the next three years.  For the subsequent two years, the firm plans on retaining 50% of its earnings.  It will then retain only 25% of its earnings from that point forward.  Retained earnings will be invested in projects with an expected return of 20% per year.  If Bean's equity cost of capital is 12%, then the price of a share of Bean's stock is closest to:

  1. A) $17.00
  2. B) $10.75
  3. C) $27.75
  4. D) $43.50

Answer:  C

Explanation:  C)

Year

Earnings

Dividends

g

1

$2.00

$0.00

20%

2

$2.40

$0.00

20%

3

$2.88

$0.00

20%

4

$3.46

$1.73

10%

5

$3.80

$1.90

10%

6

$4.18

$3.14

5%

 

P0 = 1.73/(1.12)4 + 1.90/1.125 + (3.14/(.12 - .05))/1.125 = 27.63

Each g is calculated as the 20% return on the projects × the retention ratio.

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

21) Monsters Inc. is a utility company that recently paid a common stock dividend of $2.35 per share.  Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.

Answer:  Using the constant growth dividend valuation model

              VC = D1/(kc - g)

                    = D0 × (1 + g)/(kc - g)

                    = $2.35 × (1.07)/(0.12 - 0.07) = $ 50.29

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

22) MJ LTD is expected to grow at various rates over the next five years.  The company just paid a $1.00 dividend.  The company expects to grow at 20% for the next two years (effecting D1 and D2), then the company expects to grow at 10% for three additional years (D3, D4, D5) after which the company expects to grow at a constant rate of 5% per year indefinitely.  If the required rate of return on MJ's common stock is 12%, then what is a share of MJ's stock worth?

Answer: 

Time Period

Dividend

Present Value

 1

$1.00(1.20)

$1.00(1.20)/(1.12) = 1.071

 2

$1.00(1.20)2

$1.00(1.20)2/(1.12)2 = 1.148

 3

$1.00(1.20)2(1.10)1

$1.00(1.20)2(1.10)/(1.12)3 = 1.127

 4

$1.00(1.20)2(1.10)2

$1.00(1.20)2(1.10)2/(1.12)4 = 1.107

 5

$1.00(1.20)2(1.10)3

$1.00(1.20)2(1.10)3/(1.12)5 = 1.088

 6

$1.00(1.20)2(1.10)3(1.05)

$1.00(1.20)2(1.10)3(1.05)/[(.12 - .05)(1.12)5] = 16.313

 

Current Value of Share = 1.071 + 1.148 + 1.127 + 1.107 + 1.088 + 16.313 = $21.85

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

 

23) Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four years (effecting D1, D2, D3, and D4).  Beginning in year five, the growth rate is expected to drop to 7 percent per year and last indefinitely.  If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent, then what is the value of a share of GRE?

Answer: 

Time Period

Dividend

Present Value

 1

$2.50(1.25)1

$2.00(1.25)/(1.15) = 2.174

2

$2.00(1.25)2

$2.00(1.25)2/(1.15)2 = 2.363

3

$2.00(1.25)3

$2.00(1.25)3/(1.15)3 = 2.568

4

$2.00(1.25)4

$2.00(1.25)4/(1.15)4 = 2.792

5

$2.00(1.25)4(1.07)

$2.00(1.25)4(1.07)/[(.15 - .07)(1.15)4 ] = 37.34

 

Current Value of Share = 2.174 + 2.363 + 2.568 + 2.792 + 37.34 = $47.24

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

24) Which of the following statements is FALSE?

  1. A) There are two potential sources of cash flows from owning a stock.
  2. B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV.
  3. C) An investor might generate cash by choosing to sell the shares at some future date.
  4. D) Because the cash flows from stock are known with certainty, we can discount them using the risk-free interest rate.

Answer:  D

Explanation:  D) Because these cash flows are risky, we cannot discount them using the risk-free interest rate.

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

25) When discounting dividends you should use:

  1. A) the weighted average cost of capital.
  2. B) the after tax weighted average cost of capital.
  3. C) the equity cost of capital.
  4. D) the before tax cost of debt.

Answer:  C

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

 

26) Which of the following statements is FALSE?

  1. A) The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm's shares.
  2. B) The price of a share of stock is equal to the present value of the expected future dividends it will pay.
  3. C) If the current stock price were less than P0= , it would be a negative NPV investment, and we would expect investors to rush in and sell it, driving down the stocks price.

 

  1. D) The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it.

Answer:  C

Explanation:  C) In this case the stock would be undervalued and we would expect investors to buy it.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

27) Which of the following statements is FALSE?

  1. A) We must discount the cash flows from stock based on the equity cost of capital for the stock.
  2. B) The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock.
  3. C) The firm might pay out cash to its shareholders in the form of a dividend.
  4. D) The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.

Answer:  D

Explanation:  D) The dividend yield is the annual dividend divided by the current price.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

28) Which of the following statements is FALSE?

  1. A) Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor's expectations at the time the stock is purchased.
  2. B) The capital gain is the difference between the expected sale price and the purchase price of the stock.
  3. C) The sum of the dividend yield and the capital gain rate is called the total return of the stock.
  4. D) We divide the capital gain by the expected future stock price to calculate the capital gain rate.

Answer:  D

Explanation:  D) The capital gains rate is the capital gain divided by the current stock price.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

 

29) Which of the following statements is FALSE?

  1. A) An investor will be willing to pay up to the point at which the current price of a share of stock equals the present value of the expected future dividends and the expected future sale price.
  2. B) The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk.
  3. C) The total amount received in dividends and from selling the stock will depend on the investor's investment horizon.
  4. D) If the current stock price were greater than P0= , it would be a positive NPV investment, and we would expect investors to rush in and buy it, driving up the stocks price.

Answer:  D

Explanation:  D) It would be a negative NPV investment.

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

30) Which of the following formulas is INCORRECT?

  1. A) Capital Gains Rate =
  2. B) Dividend Yield =
  3. C) P0= +
  4. D) rE= Capital Gains Rate + Dividend Yield

Answer:  A

Explanation:  A) Capital Gains Rate =

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

 

 

31) Which of the following formulas is INCORRECT?

  1. A) P0= +  + ... +  
  2. B) P0=
  3. C) rE=
  4. D) P0=

Answer:  C

Explanation:  C) rE =

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Conceptual

Use the information for the question(s) below.

 

Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.  You expect Von Bora's stock price to be $25.00 at the end of two years.  Von Bora's equity cost of capital is 10%.

 

32) The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to:

  1. A) $23.15
  2. B) $20.65
  3. C) $21.95
  4. D) $21.90

Answer:  A

Explanation:  A) P0 =  +  =  +  = $23.17

Diff: 1

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

 

33) Suppose you plan to hold Von Bora stock for one year.  The price one would expect to be able to sell a share of Von Bora stock for in one year is closest to:

  1. A) $26.50
  2. B) $22.70
  3. C) $23.15
  4. D) $24.10

Answer:  D

Explanation:  D) P1 =  =  = $24.10

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

34) Suppose you plan to hold Von Bora stock for only one year.  Your capital gain from holding Von Bora stock for the first year is closest to:

  1. A) $0.95
  2. B) $1.40
  3. C) $1.85
  4. D) $1.25

Answer:  A

Explanation:  A) P1 =  =  = $24.10

 

P0 =  +  =  +  = $23.17

 

Capital Gain = P1 - P0 = 24.10 - 23.17 = $0.93

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

35) Suppose you plan to hold Von Bora stock for only one year.  Your capital gain rate from holding Von Bora stock for the first year is closest to:

  1. A) 3.5%
  2. B) 4.0%
  3. C) 6.0%
  4. D) 4.5%

Answer:  B

Explanation:  B) P1 =  =  = $24.10

 

P0 =  +  =  +  = $23.17

 

Capital Gain = P1 - P0 = 24.10 - 23.17 = $0.93

Capital Gain rate = capital gain/P0 = 0.93/23.17 = .0401 or 4.0%

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

36) Suppose you plan to hold Von Bora stock for only one year.  Your dividend yield from holding Von Bora stock for the first year is closest to:

  1. A) 6.0%
  2. B) 4.0%
  3. C) 6.5%
  4. D) 5.5%

Answer:  A

Explanation:  A) P0 =  +  =  +  = $23.17

 

Dividend yield = Div1/P0 = $1.40/23.17 = .0604 or 6.0%

Diff: 2

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

37) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.  You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid.  The capital gain rate that you will receive on your investment is closest to:

  1. A) 4.00%
  2. B) 3.75%
  3. C) 6.25%
  4. D) 3.50%

Answer:  B

Explanation:  B) P1 =  =  = $24.10

 

So capital gain rate = (P2 - P1)/P1 = ($25.00 - $24.10)/$24.10 = .03734 or 3.73%

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

38) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.  You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid.  The dividend yield that you will receive on your investment is closest to:

  1. A) 5.75%
  2. B) 6.50%
  3. C) 6.25%
  4. D) 4.00%

Answer:  C

Explanation:  C) P1 =  =  = $24.10

 

So dividend yield = $1.50/$24.10 = .0622 or 6.22%

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

39) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.  You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid.  The total return that you will receive on your investment is closest to:

  1. A) 9.50%
  2. B) 10.75%
  3. C) 10.25%
  4. D) 10.00%

Answer:  D

Explanation:  D) P1 =  =  = $24.10

 

So dividend yield = $1.50/$24.10 = .0622 or 6.22%

 

So capital gain rate = (P2 - P1)/P1 = ($25.00 - $24.10)/$24.10 = .03734 or 3.73%

 

Total return = capital gains rate + dividend yield = 3.73% + 6.22% = 9.95%

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

40) Suppose you plan to hold Von Bora stock for only one year.  Calculate your total return from holding Von Bora stock for the first year.

Answer:  P1 =  =  = $24.10

 

P0 =  +  =  +  = $23.17

 

Capital Gain = P1 - P0 = 24.10 - 23.17 = $0.93

 

Capital Gain rate = capital gain/P0 = 0.93/23.17 = .0401 or 4.0%

 

Dividend yield = Div1/P0 = $1.40/23.17 = .0604 or 6.0%

 

Total return = capital gain rate + dividend yield = 4.0% + 6.0% = 10%

Diff: 3

Section:  9.1 The Dividend-Discount Model

Skill:  Analytical

 

9.2   Applying the Dividend-Discount Model

 

1) Taggart Transcontinental has a divided yield of 2.5%. Taggart's equity cost of capital is 10%, and its dividends are expected to grow at a constant rate.  Based on this information, Taggart's constant growth rate in dividends is closest to:

  1. A) 2.5%
  2. B) 5.0%
  3. C) 10.0%
  4. D) 7.5%

Answer:  D

Explanation:  D) P0 =  → re - g =  = .10 - g = .025 = g = .075 or 7.5%

Diff: 2

Section:  9.2 Applying the Dividend-Discount Model

Skill:  Analytical

 

2) Wyatt Oil presently pays no dividend. You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter. IF Wyatt Oil's equity cost of capital is 12%, then the value of a share of Wyatt Oil today is:

  1. A) $4.67
  2. B) $5.00
  3. C) $6.25
  4. D) $7.00

Answer:  C

Explanation:  C) P0 =  +  = $6.25

Diff: 2

Section:  9.2 Applying the Dividend-Discount Model

Skill:  Analytical

 

3) Kinston Industries just announced that it will cut its dividend from $3.00 to $2.00 per share and use the extra funds to expand its operations. Kinston's dividends were expected to grow at a 2% rate, and its share price was $37.50. With the new expansion, Kinston dividends are expected to grow at a 5% rate. Kinston's share price following this announcement should be:

  1. A) $20.00
  2. B) $30.00
  3. C) $37.50
  4. D) $40.00

Answer:  D

Explanation:  D) Step #1 re =  + .02 = .10

Step #2      P0 =  = 40.00

Diff: 2

Section:  9.2 Applying the Dividend-Discount Model

Skill:  Analytical

4) Rearden Metals expects to have earnings this coming year of $2.50 per share. Rearden plans to retain all of its earnings for the next year. For the subsequent three years, the firm will retain 50% of its earnings. It will ten retain 25% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 20% per year. Any earnings that are not retained will be paid out as dividends. Assume Rearden's shares outstanding remains constant and all earnings growth comes from the investment of retained earnings. If Rearden's equity cost of capital is 10%, then Rearden's stock price is closest to:

  1. A) $40.80
  2. B) $44.60
  3. C) $59.80
  4. D) $63.50

Answer:  B

Explanation:  B)

Year

EPS

Retained

Earnings

Growth in Earnings (.20 × R.E.)

Dividends

1

$2.50

$2.50

$0.50

0

2

$3.00

$1.50

$0.30

$1.50

3

$3.30

$1.65

$0.33

$1.65

4

$3.63

$1.82

$0.36

$1.82

5

$3.99

$1.00

$0.20

$2.99

 

growthyear 5 =  = .050125 or 5%

P0 =  +  +  +  = 44.57

Diff: 3

Section:  9.2 Applying the Dividend-Discount Model

Skill:  Analytical

 

 

9.3   Total Payout and Free Cash Flow Valuation Models

 

1) Which of the following statements is FALSE?

  1. A) The total payout model allows us to ignore the firm's choice between dividends and share repurchases.
  2. B) By repurchasing shares, the firm increases its share count, which decreases its earning and dividends on a per-share basis.
  3. C) The total payout model discounts the total payouts that the firm makes to shareholders, which is the total amount spent on both dividends and share repurchases.
  4. D) In the dividend discount model, we implicitly assume that any cash paid out to the shareholders takes the form of a dividend.

Answer:  B

Explanation:  B) By repurchasing shares, the firm decreases its share count, which increases its earning and dividends on a per-share basis.

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

2) If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the:

  1. A) enterprise value model.
  2. B) total payout model.
  3. C) dividend discount model.
  4. D) discounted free cash flow model.

Answer:  C

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

3) If you want to value a firm that has consistent earnings growth, but varies how it pays out these earnings to shareholders between dividends and repurchases, the simplest model for you to use is the:

  1. A) enterprise value model.
  2. B) dividend discount model.
  3. C) total payout model.
  4. D) discounted free cash flow model.

Answer:  C

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

4) If you want to value a firm but don't want to explicitly forecast its dividends, share repurchases, or its use of debt, what is the simplest model for you to use?

  1. A) Discounted free cash flow model
  2. B) Dividend discount model
  3. C) Enterprise value model
  4. D) Total payout model

Answer:  A

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

5) Which of the following statements is FALSE?

  1. A) In a share repurchase, the firm uses excess cash to buy back its own stock.
  2. B) The discounted free cash flow model begins by determining the value of the firm's equity.
  3. C) The discounted free cash flow model focuses on the cash flows to all of the firm's investors, both debt and equity holders, and allows us to avoid estimating the impact of the firm's borrowing decisions on earnings.
  4. D) In recent years, an increasing number of firms have replaced dividend payouts with share repurchases.

Answer:  B

Explanation:  B) The discounted free cash flow model is used to find the value of the firm.

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

6) Which of the following statements is FALSE?

  1. A) To estimate a firm's enterprise value, we compute the present value of the free cash flows (FCF) that the firm has available to pay equity holders.
  2. B) The NPV of any individual project represents its contribution to the firm's enterprise value.
  3. C) When using the total payout model, we discount total dividends and share repurchases, and use the growth rate in earnings when forecasting the growth of the firm's payout.
  4. D) In the total payout model, we first value the firm's equity, rather than just a single share.

Answer:  A

Explanation:  A) FCF is available to pay both debt and equity holders.

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

7) Which of the following statements is FALSE?

  1. A) The more cash the firm uses to repurchase shares, the less it has available to pay dividends.
  2. B) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered.
  3. C) We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow.
  4. D) We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash and paying off all debts.

Answer:  B

Explanation:  B) FCF is cash generated by the firm before payments to debt and equity holders.

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

 

8) Which of the following statements is FALSE?

  1. A) The firm's weighted average cost of capital (WACC) denoted rwaccis the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt.
  2. B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model.
  3. C) We interpret rwaccas the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.
  4. D) When using the discounted free cash flow model we should use the firm's equity cost of capital.

Answer:  D

Explanation:  D) You would use the firm's weighted average cost of capital.

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

9) Which of the following statements is FALSE?

  1. A) The long-run growth rate gFCFis typically based on the expected long-run growth rate of the firm's revenues.
  2. B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones.
  3. C) If the firm has no debt then rwacc= the risk-free rate of return.
  4. D) When using the discounted free cash flow model, we forecast the firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.

Answer:  C

Explanation:  C) If the firm has no debt then rwacc  = the cost of equity.

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 

10) Which of the following equations is INCORRECT?

  1. A) P0=
  2. B) V0= +  + ... +  +
  3. C) Free Cash Flow = EBIT × (1 - τc) + Depreciation - Capital Expenditures - DNWC
  4. D) Enterprise Value = Market Value of Equity + Debt - Cash

Answer:  A

Explanation:  A) P0 =

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Conceptual

 


Use the following information to answer the question(s) below.

 

Taggart Transcontinental pays no dividends, but spent $4 billion on share repurchases last year. Taggart's equity cost of capital is 13% and the amount spent on repurchases is expected to grow by 5% per year. Taggart currently has 2 billion shares outstanding.

 

11) Taggart's market capitalization is closest to:

  1. A) $25 billion
  2. B) $31 billion
  3. C) $40 billion
  4. D) $50 billion

Answer:  D

Explanation:  D) Market Capitalization =  = $50 billion

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

12) Taggart's stock price is closest to:

  1. A) $12.50
  2. B) $15.40
  3. C) $20.00
  4. D) $25.00

Answer:  D

Explanation:  D) Market Capitalization =  = $50 billion/2 billion shares = $25.00 per share

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 


Use the following information to answer the question(s) below.

 

Wyatt Oil, an all-equity financed firm, has just reported EPS of $4.00 per share. Despite an economic downturn, Wyatt is confident regarding its current investment opportunities, but due to the current financial crisis, Wyatt does not wish to fund these investments externally. Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share) and retain these funds instead. The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. All dividends and repurchases occur at the end of each year.

 

Wyatt's existing operations are expected to generate the current level of earnings per share in the future. Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth. Wyatt's current equity cost of capital is 12%.

 

13) Wyatt's expected EPS in two years is closest to:

  1. A) $4.48
  2. B) $4.64
  3. C) $5.04
  4. D) $5.38

Answer:  C

Explanation:  C) Retention ratioYear 1 =  = .75 × 16% return = 12% growth rate

EPSYear 1 = $4.00 (1.12) = $4.48

Retention ratioYear 2 =  = .776786 × 16% return = 12.4286% growth rate

EPSYear 2 = $4.48 (1.124286) = $5.0368

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

14) Wyatt's current stock price is closest to:

  1. A) $51.23
  2. B) $54.00
  3. C) $49.11
  4. D) $61.38

Answer:  C

Explanation:  C) Retention ratioYear 1 =  = .75 × 16% return = 12% growth rate

EPSYear 1 = $4.00 (1.12) = $4.48

Retention ratioYear 2 =  = .776786 × 16% return = 12.4286% growth rate

EPSYear 2 = $4.48 (1.124286) = $5.0368

Retention ratioYear 3 = .40% × 16% return = 6.4% growth rate

P0 =  +  = $49.11

Diff: 3

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

15) The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to have earnings of $500 million this year.  Rufus plans to pay out 40% of its earnings in dividends and they expect to use another 20% of their earnings to repurchase shares.  If Rufus' equity cost of capital is 15% and Rufus' earnings are expected to grow at a rate of 3% per year, then the value of a share of Rufus stock is closest to:

  1. A) $13.35
  2. B) $33.50
  3. C) $20.00
  4. D) $16.00

Answer:  C

Explanation:  C) Dividends = $500 × .40 = $200 million

Repurchases = $500 × .20 = $100 million

 

PV(Future Total Dividends and Repurchases) = ($200 + $100)/(.15 - .03) = $2500 million

 

P0 = $2500 million/125 million shares = $20 per share

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical


Use the information for the question(s) below.

 

You expect CCM Corporation to generate the following free cash flows over the next five years:

 

Year

1

2

3

4

5

FCF ($ millions)

25

28

32

37

40

 

Following year five, you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.

 

16) The enterprise value of CCM corporation is closest to:

  1. A) $396 million
  2. B) $290 million
  3. C) $382 million
  4. D) $350 million

Answer:  A

Explanation:  A) V0 =  +  + ... +  +

 

V0 =  +  +  +  +  = 395.58 million

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

17) If CCM has $200 million of debt and 8 million shares of stock outstanding, then the share price for CCM is closest to:

  1. A) $49.50
  2. B) $12.50
  3. C) $19.35
  4. D) $24.50

Answer:  D

Explanation:  D) V0 =  +  + ... +  +

 

V0 =  +  +  +  +  = 395.58 million or 396 million.

 

Equity value = $396 - $200 (debt) = $196 million/8 million shares = $24.50

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

18) If CCM has $150 million of debt and 12 million shares of stock outstanding, then the share price for CCM is closest to:

  1. A) $49.50
  2. B) $11.25
  3. C) $20.50
  4. D) $22.75

Answer:  C

Explanation:  C) V0 =  +  + ... +  +

 

V0 =  +  +  +  +  = 395.58 million or 396 million.

 

Equity value = $396 - $150 (debt) = $246 million/12 million shares = $20.50

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 


Use the information for the question(s) below.

 

Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future. Defenestration's equity cost of capital is 13%.

 

19) Assuming that Defenestration's dividend payout rate and expected growth rate remain constant, and Defenestration does not issue or repurchase shares, then Defenestration's stock price is closest to:

  1. A) $50.00
  2. B) $32.30
  3. C) $22.25
  4. D) $30.75

Answer:  A

Explanation:  A) P0 =  =  = $50

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

20) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.  If Defenestration's payout rate remains constant, then Defenestration's stock price is closest to:

  1. A) $50.00
  2. B) $22.25
  3. C) $32.30
  4. D) $30.75

Answer:  A

Explanation:  A) P0 =  =  = $50

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

 

21) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.  If Defenestration maintains this dividend and total payout rate, then the rate at which Defenestration's dividends and earnings per share are expected to grow is closest to:

  1. A) 7%
  2. B) 13%
  3. C) 9%
  4. D) 5%

Answer:  C

Explanation:  C) P0 =  =  = $50

 

g = rE - Div1/P0 = .13 - $2/$50 = .09 or 9%

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

22) A firm's net investment is:

  1. A) its capital expenditures in excess of depreciation.
  2. B) its free cash flow net of increases in working capital.
  3. C) its enterprise value in excess of debt owed.
  4. D) the market value of equity plus debt.

Answer:  A

Diff: 1

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Definition

Use the information for the question(s) below.

 

You expect DM Corporation to generate the following free cash flows over the next five years:

 

Year

1

2

3

4

5

FCF ($ millions)

75

84

96

111

120

 

Beginning with year six, you estimate that DM's free cash flows will grow at 6% per year and that DM's weighted average cost of capital is 15%.

 

23) Calculate the enterprise value for DM Corporation.

Answer:  V0 =  +  + ... +  +

 

V0 =  +  +  +  + +  = 1017.66 million

Diff: 2

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

 

24) If DM has $500 million of debt and 14 million shares of stock outstanding, then what is the price per share for DM Corporation?

Answer:  V0 =  +  + ... +  +

 

V0 =  +  +  +  + +  = 1017.66 million or $1018 million

Equity value = $1018 - $500 (debt) = $518 million/14 million shares = $37.00

 

Diff: 3

Section:  9.3 Total Payout and Free Cash Flow Valuation Models

Skill:  Analytical

9.4   Valuation Based on Comparable Firms

 

1) Which of the following statements is FALSE?

  1. A) Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale.
  2. B) In the method of comparables, we estimate the value of the firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future.
  3. C) Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm.
  4. D) A valuation multiple is a ratio of some measure of the firm's scale to the value of the firm.

Answer:  D

Explanation:  D) A valuation multiple is a ratio of the value of the firm to some measure of the firm's scale.

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

 

2) Which of the following statements is FALSE?

  1. A) The most common valuation multiple is the price-earnings (P/E) ratio.
  2. B) You should be willing to pay proportionally more for a stock with lower current earnings.
  3. C) A firm's P/E ratio is equal to the share price divided by its earnings per share.
  4. D) The intuition behind the use of the P/E ratio is that when you buy a stock, you are in sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.

Answer:  B

Explanation:  B) You should be willing to pay proportionally more for a stock with higher current earnings.

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

 

 

3) Which of the following statements is FALSE?

  1. A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average P/E ratio of comparable firms.
  2. B) For valuation purposes, the trailing P/E ratio is generally preferred, since it is based on actual not expected earnings.
  3. C) Forward earnings are the expected earnings over the coming 12 months.
  4. D) Trailing earnings are the earnings over the previous 12 months.

Answer:  B

Explanation:  B) For valuation purposes, the leading P/E ratio is generally preferred, since it is based on the expected earnings.

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

4) Which of the following statements is FALSE?

  1. A) Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made.
  2. B) We can compute a firm's P/E ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing P/E or forward P/E.
  3. C) It is common practice to use valuation multiples based on the firm's enterprise value.
  4. D) Using a valuation multiple based on comparables is best viewed as a "shortcut" to the discounted cash flow method of valuation.

Answer:  A

Explanation:  A) Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows before interest payments are made.

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

 

5) Which of the following statements is FALSE?

  1. A) The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patient on a new technology is ignored when we apply a valuation multiple.
  2. B) Valuation multiples have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth.
  3. C) For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used.
  4. D) Using multiples will not help us determine if an entire industry is overvalued.

Answer:  B

Explanation:  B) Discounted cash flows methods have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth.

Diff: 3

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

 

 

6) Which of the following statements is FALSE?

  1. A) Because capital expenditures can vary substantially from period to period, most practitioners rely on enterprise value to free cash flow multiples.
  2. B) Common multiples to consider are enterprise value to EBIT, EBITDA, and free cash flow.
  3. C) If two stocks have the same payout and EPS growth rates as well as equivalent risk, then they should have the same P/E ratio.
  4. D) Looking at enterprise value as a multiple of sales can be useful if it is reasonable to assume that the firms will maintain similar margins in the future.

Answer:  A

Explanation:  A) Because capital expenditures can vary substantially from period to period (e.g., a firm may need to add capacity and build a new plant one year, but then not need to expand further for many years), most practitioners rely on enterprise value to EBITDA multiples.

Diff: 3

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

7) Which of the following formulas is INCORRECT?

  1. A) Forward =
  2. B) Forward =
  3. C) =
  4. D) Forward =

Answer:  B

Explanation:  B) Forward  =

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical


Use the following information to answer the question(s) below.

 

Company

Ticker

Price

per Share

Earnings

per Share

Book Value

per Share

Abbott Labs

ABT

54.35

3.69

13.79

Bristol-Myers-Squibb

BMY

25.45

1.93

7.33

GlaxoSmithKline

GSK

41.3

3.15

6.03

Johnson & Johnson

JNJ

62.6

4.58

18.27

Merck

MRK

36.25

3.81

10.86

Pfizer

PFE

$18.30

$1.20

8.19

 

8) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the average P/E ratio for its competitors, Novartis' stock price is closest to:

  1. A) $13.00
  2. B) $31.86
  3. C) $43.47
  4. D) $44.35

Answer:  D

Explanation:  D)

Company

Ticker

Price

per Share

Earnings

per Share

Book Value

per Share

Price/

Earnings

Price/

Book

Abbott Labs

ABT

54.35

3.69

13.79

14.73

3.94

Bristol-Myers-

Squibb

BMY

25.45

1.93

7.33

13.19

3.47

GlaxoSmithKline

GSK

41.3

3.15

6.03

13.11

6.85

Johnson & Johnson

JNJ

62.6

4.58

18.27

13.67

3.43

Merck

MRK

36.25

3.81

10.86

9.51

3.34

Pfizer

PFE

$18.30

$1.20

8.19

15.25

2.23

Average

 

 

 

 

13.24

3.88

 

Novartis' stock price = 3.35 × 13.24 = $44.35

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

9) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the average price-to-book ratio for its competitors, Novartis' stock price is closest to:

  1. A) $13.00
  2. B) $22.95
  3. C) $39.70
  4. D) $44.35

Answer:  A

Explanation:  A)

Company

Ticker

Price

per Share

Earnings

per Share

Book Value

per Share

Price/

Earnings

Price/

Book

Abbott Labs

ABT

54.35

3.69

13.79

14.73

3.94

Bristol-Myers-

Squibb

BMY

25.45

1.93

7.33

13.19

3.47

GlaxoSmithKline

GSK

41.3

3.15

6.03

13.11

6.85

Johnson & Johnson

JNJ

62.6

4.58

18.27

13.67

3.43

Merck

MRK

36.25

3.81

10.86

9.51

3.34

Pfizer

PFE

$18.30

$1.20

8.19

15.25

2.23

Average

 

 

 

 

13.24

3.88

 

Novartis' stock price = 3.35 × 3.88 = $12.998 or $13.00

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

 

10) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the P/E ratios for its competitors, the highest expected stock price for Novartis is closest to:

  1. A) $31.86
  2. B) $44.35
  3. C) $51.09
  4. D) $62.60

Answer:  C

Explanation:  C)

Company

Ticker

Price

per Share

Earnings

per Share

Book Value

per Share

Price/

Earnings

Price/

Book

Abbott Labs

ABT

54.35

3.69

13.79

14.73

3.94

Bristol-Myers-

Squibb

BMY

25.45

1.93

7.33

13.19

3.47

GlaxoSmithKline

GSK

41.3

3.15

6.03

13.11

6.85

Johnson & Johnson

JNJ

62.6

4.58

18.27

13.67

3.43

Merck

MRK

36.25

3.81

10.86

9.51

3.34

Pfizer

PFE

$18.30

$1.20

8.19

15.25

2.23

Average

 

 

 

 

13.24

3.88

 

Novartis' stock price = 3.35 × 15.25 = $51.09

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

11) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the price-to-book ratios for its competitors, the lowest expected stock price for Novartis is closest to:

  1. A) $7.47
  2. B) $13.00
  3. C) $22.95
  4. D) $31.86

Answer:  A

Explanation:  A)

Company

Ticker

Price

per Share

Earnings

per Share

Book Value

per Share

Price/

Earnings

Price/

Book

Abbott Labs

ABT

54.35

3.69

13.79

14.73

3.94

Bristol-Myers-

Squibb

BMY

25.45

1.93

7.33

13.19

3.47

GlaxoSmithKline

GSK

41.3

3.15

6.03

13.11

6.85

Johnson & Johnson

JNJ

62.6

4.58

18.27

13.67

3.43

Merck

MRK

36.25

3.81

10.86

9.51

3.34

Pfizer

PFE

$18.30

$1.20

8.19

15.25

2.23

Average

 

 

 

 

13.24

3.88

 

Novartis' stock price = 3.35 × 2.23 = $7.47

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

12) You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.  If the average P/E ratio for the appliance industry sector is 17.0, the value of a share of Whirlpool stock based upon the comparables approach is closest to:

  1. A) $103.70
  2. B) $27.90
  3. C) $35.90
  4. D) $23.10

Answer:  A

Explanation:  A) Price = Forward earnings × P/E = $6.10 × 17 = $103.70

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

 

13) You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.  If Whirlpool stock is currently trading at $87.00 per share, then Whirlpool's P/E ratio is closest to:

  1. A) 17.00
  2. B) 13.50
  3. C) 14.25
  4. D) 7.00

Answer:  C

Explanation:  C) P/E = price/forward earnings = $87/$6.10 = 14.262

Diff: 1

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

Use the information for the question(s) below.

 

Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45 million.  TT also has 5 million shares outstanding and debt of $150 million (net of cash).  You believe that Oklahoma Logistics and Transport (OLT) is comparable to TT in terms of its underlying business, but OLT has no debt.  OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7.

 

14) Based upon the price earnings multiple, the value of a share of Texas Trucking is closest to:

  1. A) $49.30
  2. B) $43.10
  3. C) $24.15
  4. D) $27.60

Answer:  B

Explanation:  B) Price = forward earnings × P/E = 3.45 × 12.5 = 43.12

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

15) Based upon the enterprise value to EBITDA ratio, the value of a share of Texas Trucking is closest to:

  1. A) $33.00
  2. B) $82.50
  3. C) $43.10
  4. D) $21.25

Answer:  A

Explanation:  A) Enterprise value = EBITDA × multiple = $45 × 7 = $315 - $150 debt = $165 equity value/5 million shares = $33.00 per share

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Analytical

 

 

16) What are some common multiples used to value stocks?

Answer:  Price to Earnings

Enterprise value to sales

Enterprise value to free cash flow

Enterprise value to EBITDA

Enterprise value to EBIT

Price to book value per share

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

 

17) What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

Answer:  Comparable firms have similar future prospects.

No fundamental differences between firms.

Same growth rates.

Same costs of capital.

Industry is correctly valued.

Diff: 2

Section:  9.4 Valuation Based on Comparable Firms

Skill:  Conceptual

9.5   Information, Competition, and Stock Prices

 

1) Which of the following is NOT a situation where a trader is able to identify positive NPV trading opportunities in the securities markets?

  1. A) An investor who has access to information known only to a few investors.
  2. B) An investor who has lower trading costs than other market participants.
  3. C) An investor who gets up really early in the morning so he can be the first to read and act upon the information contained in that day's Wall Street Journal.
  4. D) An investor who has expertise in a highly complicated area for which a company has just released information.

Answer:  C

Diff: 1

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Conceptual

 

2) Which of the following statements is FALSE?

  1. A) Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows.
  2. B) Given accurate information about any two of these variables (a firm's future cash flows, its cost of capital, and its share price) a valuation model allows us to make inferences about the third variable.
  3. C) A valuation model will tell us the most about the variable for which our prior information is the least reliable.
  4. D) The idea that investors are able to identify positive NPV trading opportunities is referred to as the efficient markets hypothesis.

Answer:  D

Diff: 1

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Conceptual

 

3) Which of the following statements is FALSE?

  1. A) Stock markets aggregate the information and view of many different investors.
  2. B) Only in the relatively rare case in which we have some superior information that other investors lack regarding the firm's cash flows and cost of capital would it make sense to second-guess the market stock price.
  3. C) In most situations, a valuation model is best applied to tell us something about the value of the firm's stock.
  4. D) The efficient market hypothesis implies that securities will be fairly priced, based on their future cash flows, given all information that is available to investors.

Answer:  C

Diff: 1

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Conceptual

4) Which of the following statements is FALSE?

  1. A) If the profit opportunities from having private information are large, other individuals will attempt to gain the expertise and devote the resources needed to acquire it.
  2. B) When private information is relegated to the hands of a relatively small number of investors, these investors may be able to profit by trading on their information.
  3. C) When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests that they value the stock differently.
  4. D) Since stock markets aggregate the information and view of many different investors, we expect the stock price to react slowly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock.

Answer:  D

Explanation:  D) Since stock markets aggregate the information and view of many different investors, we expect the stock price to react quickly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock.

Diff: 2

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Conceptual

 

Use the following information to answer the question(s) below.

 

Nielson Motors has a share price of $50.00. Its dividend was $2.50, and you expect Nielson Motors to raise its dividend by approximately 6% per year in perpetuity.

 

5) If Nielson's equity cost of capital is 13%, then Nielson's expected share price is closest to:

  1. A) $19.23
  2. B) $37.86
  3. C) $35.71
  4. D) $50.00

Answer:  B

Explanation:  B) P = $2.50(1.06)/(.13 - .06) = 37.86

Diff: 1

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

 

 

6) Given Nielson's current share price, if Nielson's equity cost of capital is 13%, then Nielson's expected growth rate is closest to:

  1. A) 5%
  2. B) 6%
  3. C) 7%
  4. D) 8%

Answer:  D

Explanation:  D) G = .13 - 2.50/50.00 = .08 or 8%

Diff: 2

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

7) Wyatt Oil just reported that a major fire destroyed one of its oil production facilities in Colorado. While the facility was fully insured, the loss of oil production will decrease Wyatt's free cash flow by $120 million at the end of this year and by $80 million at the end of next year. Wyatt has 50 million shares outstanding and has a weighted average cost of capital of 9%. Assuming the value of Wyatt's debt is not affected by this event, the expected decrease in Wyatt's stock price is closest to:

  1. A) $2.00
  2. B) $3.55
  3. C) $3.87
  4. D) $4.00

Answer:  B

Explanation:  B) Decline =  = $3.5485 per share

Diff: 2

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

 

8) Vacinox is a biotechnology firm that is about to announce the results of its clinical trials of a potential new vaccine. If the trials are successful, Vacinox stock will be worth $80 per share. However, if the trials are not successful, then Vacinox stock will only be worth $12 per share. If on the morning that the announcement is scheduled, Vacinox stock is trading for $60.96, then the probability that investors place on the trials being successful are closest to:

  1. A) 48%
  2. B) 50%
  3. C) 60%
  4. D) 72%

Answer:  D

Explanation:  D) price = (p)success + (1 - p)fail = 60.96 = p(80) + (1 - p)12 → 68p = 48.96 → p = .72

Diff: 2

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

 

9) Because of a catastrophic plane crash, the FAA announced that it is withdrawing its air worthiness certification for Fly by Night Aviation's (FBNA) new four seat private plane.  As a result FBNA's future expected free cash flows will decline by $40 million a year for the next eight years.  FBNA has 20 million shares outstanding, no debt, and an equity cost of capital of 12%.  If this news is a complete surprise to investors, then the amount that FBNA's stock price should fall upon the announcement is closest to:

  1. A) $2.00
  2. B) $16.00
  3. C) $16.70
  4. D) $9.90

Answer:  D

Explanation:  D) FV = 0

PMT = 40

I = 12

N = 8

Compute PV = 198.71/20 shares = $9.94

Diff: 2

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

 

Use the information for the question(s) below.

 

In a surprise announcement, NASA released details of a major contract with Lockheed-Martin (LMT) that would increase LMT's market value by $7.5 billion.  It was widely expected by the market that this contract would be awarded to LMT's major competitor Boeing (BA).  Assume that Boeing has 800 million shares outstanding and Lockheed Martin has 425 million shares outstanding.  Prior to this announcement, the market felt that the probability of Boeing winning the contract was 90% and that Lockheed-Martin's chance was only about 10%.

 

10) What do you anticipate will happen to Lockheed-Martin and Boeing's stock prices are a result of this surprise announcement?

Answer:  Lockheed-Martin

Price increase = $7500 million × .90 (probability not already incorporated in price) = 6750/425 shares = 15.88 increase

 

Boeing

Price decrease = $7500 million × .90 (probability already incorporated in price) = 6750/800 shares = 8.44 decrease

Diff: 3

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Analytical

 

11) What are the implications of the efficient market hypothesis for corporate managers?

Answer:  A manager seeking to boost the price of her firm's stock should make investments that increase the present value of the firm's free cash flows.

 

Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows.

 

With efficient markets, the accounting consequences of a decision do not directly affect the value of the firm and should not drive decision making.

 

With efficient markets, the firm can sell its shares at a fair price to new investors.  Thus, the firm should not be constrained from raising capital to fund positive NPV investment opportunities.

Diff: 3

Section:  9.5 Information, Competition, and Stock Prices

Skill:  Conceptual

 

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

------

For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

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