Question 1

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%.
-Wyatt's current stock price is closest to:

Accepted Answer

A)  $51.23.
B)  $54.00.
C)  $49.11.
D)  $61.38.E) B) and D)
F) A) and D)

Question 2

Which of the following formulas is INCORRECT?

Accepted Answer

A)  Capital Gains Rate = 
B)  Dividend Yield = 
C)  P0 =  + 
D)  rE = Capital Gains Rate + Dividend YieldE) B) and D)
F) All of the above

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  Because capital expenditures can vary substantially from period to period,most practitioners rely on enterprise value to free cash flow multiples.
B)  Common multiples to consider are enterprise value to EBIT,EBITDA,and free cash flow.
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.
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.E) A) and B)
F) B) and D)

Question 4

Use the information for the question(s)below.
Von Bora Corporation is expected to 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%.
-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.

Accepted Answer

P1 =

=

= $24.10
P0 =

+

=

+

= $23.1...

Question 5

Use the information for the question(s) below.
Von Bora Corporation is expected to 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%.
-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:

Accepted Answer

A)  $0.95.
B)  $1.40.
C)  $1.85.
D)  $1.25.E) B) and C)
F) A) and D) A

Question 6

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:

Accepted Answer

A)  8%.
B)  6%.
C)  4%.
D)  2%.E) B) and C)
F) All of the above

Question 7

Which of the following statements is FALSE?

Accepted Answer

A)  We must discount the cash flows from stock based on the equity cost of capital for the stock.
B)  The dividend yield is the percentage return the investor expects to earn from the dividend paid by the stock.
C)  The firm might pay out cash to its shareholders in the form of a dividend.
D)  The dividend yield is the expected annual dividend of a stock,divided by its expected future sale price.E) A) and C)
F) None of the above

Question 8

Which of the following statements is FALSE?

Accepted Answer

A)  The firm's weighted average cost of capital (WAC
C)  denoted rwacc is the cost of capital that reflects the risk of the overall business,which is the combined risk of the firm's equity and debt.
B)  Intuitively,the difference between the discounted free cash flow model and the dividend-discount model is that in the dividend-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.
C)  We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.
D)  When using the discounted free cash flow model,we should use the firm's equity cost of capital.E) B) and C)
F) B) and D) D

Question 9

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:

Accepted Answer

A)  $2.00.
B)  $3.55.
C)  $3.87.
D)  $4.00.E) B) and D)
F) B) and C) B

Question 10

Which of the following statements is FALSE?

Accepted Answer

A)  As firms mature,their earnings exceed their investment needs and they begin to pay dividends.
B)  Total return equals earnings multiplied by the dividend payout rate.
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.
D)  We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.E) A) and D)
F) All of the above

Question 11

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

Accepted Answer

A)  $13.00.
B)  $22.95.
C)  $39.70.
D)  $44.35.E) A) and B)
F) B) and C)

Question 12

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%.
-What are the implications of the efficient markets hypothesis for corporate managers?

Accepted Answer

A manager seeking to boost the price of ...

Question 13

Which of the following equations is INCORRECT?

Accepted Answer

A)  P0 = 
B)  V0 =  +  + ...+  + 
C)  Free Cash Flow = EBIT × (1 - τc) + Depreciation - Capital Expenditures - ∆NWC
D)  Enterprise Value = Market Value of Equity + Debt - CashE) All of the above
F) B) and C)

Question 14

Which of the following statements is FALSE?

Accepted Answer

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.
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.
C)  It is common practice to use valuation multiples based on the firm's enterprise value.
D)  Using a valuation multiple based on comparables is best viewed as a "shortcut" to the discounted cash flow method of valuation.E) A) and C)
F) A) and B)

Question 15

Which of the following statements is FALSE?

Accepted Answer

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.
B)  The capital gain is the difference between the expected sale price and the purchase price of the stock.
C)  The sum of the dividend yield and the capital gain rate is called the total return of the stock.
D)  We divide the capital gain by the expected future stock price to calculate the capital gain rate.E) A) and D)
F) All of the above

Question 16

Which of the following statements is FALSE?

Accepted Answer

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.
B)  The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk.
C)  The total amount received in dividends and from selling the stock will depend on the investor's investment horizon.
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 stock's price.E) All of the above
F) A) and C)

Question 17

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:

Accepted Answer

A)  17.00.
B)  13.50.
C)  14.25.
D)  7.00.E) A) and B)
F) A) and C)

Question 18

Use the information for the question(s) below.
Von Bora Corporation is expected to 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%.
-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:

Accepted Answer

A)  3.5%.
B)  4.0%.
C)  6.0%.
D)  4.5%.E) A) and C)
F) C) and D)

Question 19

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:

Accepted Answer

A)  48%.
B)  50%.
C)  60%.
D)  72%.E) B) and C)
F) A) and C)

Question 20

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:

Accepted Answer

A)  $2.00.
B)  $16.00.
C)  $16.70.
D)  $9.90.E) None of the above
F) B) and D)

Exam 9: Valuing Stocks

Correct Answer
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Which of the following formulas is INCORRECT?

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Which of the following statements is FALSE?

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P1 = = = $24.10
P0 = + = + = $23.1...
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A

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Which of the following statements is FALSE?

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Which of the following statements is FALSE?

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D

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B

Which of the following statements is FALSE?

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

Correct Answer
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A manager seeking to boost the price of ...
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Which of the following equations is INCORRECT?

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Which of the following statements is FALSE?

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Which of the following statements is FALSE?

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Which of the following statements is FALSE?

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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:

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Exam 9: Valuing Stocks

Correct AnswerverifiedShow Answer

Which of the following formulas is INCORRECT?

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Which of the following statements is FALSE?

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Correct AnswerverifiedP1 = = = $24.10P0 = + = + = $23.1...View AnswerShow Answer

Correct AnswerverifiedA

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Which of the following statements is FALSE?

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Which of the following statements is FALSE?

Correct AnswerverifiedD

Correct AnswerverifiedB

Which of the following statements is FALSE?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA manager seeking to boost the price of ...View AnswerShow Answer

Which of the following equations is INCORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is FALSE?

Correct AnswerverifiedShow Answer

Which of the following statements is FALSE?

Correct AnswerverifiedShow Answer

Which of the following statements is FALSE?

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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P1 = = = $24.10
P0 = + = + = $23.1...
View Answer

Correct Answer
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A

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D

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B

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A manager seeking to boost the price of ...
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