ADVFINE Exam 1 Practice

10-14

-Covan is expected to have FCF of $10M, $12M, $13M, $14M for the next 4 yrs and then grow by 4% per year after that. -Covan has 8M shares outstanding, $3M in cash, $2M in debt. -Covan's weighted average cost of capital is 0.12. What is its stock price?

10-24

-Fairview Inc. is an ocean transport company with EBITDA of $50 million, cash of $20 million, debt of $100 million, and 10 million shares outstanding. -The ocean transport industry as a whole has an average EV/EBITDA ratio of 8.5. -What is one estimate of Fairview's enterprise value? -What is the corresponding estimate of Fairview's stock price?

16-7

ABC Corp has a current price of $11 and is expected to pay a $0.50 dividend in one year. If the stock price immediately after the dividend is expected to be $13, what is the equity cost of capital?

7-23

ABC Corp has a smart home device that opens the back door when your dog scratches at it so he can go outside. Given the phenomenal market response to this product, ABC is increasing its dividend. Dividends were $0.50 per share this past year and are expected to grow at a rate of 25% per year until the end of year 1. At that point, other companies are likely to bring out competing products. Analysts project that at the end of year 1, ABC's growth will slow to a long-run rate of 6%. If ABC's equity cost of capital is 12%, what is the value of a share today?

16-14

ABC is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,010,000 to buy the machine and have it delivered and installed. The machine is expected to raise gross revenue by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2?

8-13

After assessing that the fertilizer project offers positive NPV of $4.7 million, the management of Frederick's Feed and Farm have decided to undertake the project. They plan to announce the project in a press release at 3:45 PM today. Frederick's is currently all-equity financed, with a stock price of $30 per share and 3 million shares outstanding. What is the expected stock price reaction to the announcement?

7-17

Consolidated Edison, Inc. (Con Edison), is a regulated utility company that services the New York City area. Suppose Con Edison plans to pay $3 per share in dividends next year. If its equity cost of capital is 8% and dividends are not expected to ever change in the future, estimate the value of Con Edison's stock today.

7-30

Crane Sporting Goods expects to have earnings per share of $5 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, Crane's current share price is $62.50. Suppose Crane could cut its dividend payout rate to 50% for the foreseeable future and use the retained earnings to open new stores. The return on investment in these stores is expected to be 11%. If we assume that the risk of these new investments is the same as the risk of its existing investments, then the firm's equity cost of capital is unchanged. What effect would this new policy have on Crane's stock price?

16-16

Dollar General (DG) is expected to have free cash flow of $1.25 billion in the upcoming year. Free cash flow is expected to grow at a constant rate of 2% in perpetuity. Dollar General has $3 billion in debt outstanding, $150M in cash and equivalents, 280 million shares outstanding, and its weighted average cost of capital is 7.5%. What is the price per share of DG stock?

7-32

Lengefeld Manufacturing expects to have earnings per share of $2 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, Lengefeld's current share price is $24. Suppose Lengefeld could cut its dividend payout rate to 50% for the foreseeable future and use the retained earnings to open an additional factory. The return on investment in the new factory is expected to be 8%. If we assume that the risk of the new factory is the same as the risk of its existing factories, then the firm's equity cost of capital is unchanged. What effect would this new policy have on Lengefeld's stock price?

7-40

Pepsi paid $3.2B for SODA ($144/share) SODA had $74.4M in earnings in 2017 SODA has 22.2M shares out SODA has no debt and no cash SODA spends 57.5% of is earnings on share repurchases SODA's growth is 15% SODA's cost of capital is 16% Did Pepsi overpay?

16-17

On a particular date, Office Depot had a PE ratio 9.26. Its competitor, Staples Incorporated, had a stock price of $24.33. What are Staples approximate earnings?

8-9

Researchers at Frederick's Feed and Farm have made a breakthrough. They believe they can produce a new fertilizer at a substantial cost saving over the company's existing line of fertilizer. The new fertilizer will require a plant that can be built immediately for $60 million. Financial managers estimate that the benefits of the new fertilizer will be $26 million per year, starting at the end of the first year and lasting for three years. Assume the discount rate is 10%. Should Frederick's do the project?

7-22

Small Fry, Inc., has just invented a potato chip that looks and tastes like a french fry. Given the phenomenal market response to this product, Small Fry is increasing its dividend. Dividends were $2 per share this past year and are expected to grow at a rate of 20% per year until the end of year 2. At that point, other companies are likely to bring out competing products. Analysts project that at the end of year 2, Small Fry's growth will slow to a long-run rate of 4%. If Small Fry's equity cost of capital is 8%, what is the value of a share today?

7-20

Suppose Ford pays a dividend of $1 per share next year and has an expected return of 10%. Now suppose the stock is trading at a price of $30 per share. What is the market assuming about Ford's dividend growth rate under a constant growth model?

7-19

Suppose Target Corporation plans to pay $0.93 per share in dividends next year. If its equity cost of capital is 11% and dividends are expected to grow by 6% per year in the future, estimate the value of Target's stock.

10-29

Suppose Tecnor Industries will have free cash flows next year of $40 million. Its weighted average cost of capital is 11%, and you expect its free cash flows to grow at a rate of approximately 4% per year, though you are somewhat unsure of the precise growth rate. Tecnor has 10 million shares outstanding, no debt, and $20 million in cash. If Tecnor's stock is currently trading for $55.33 per share, how would you update your beliefs about its dividend growth rate?

7-13

Suppose you expect Walmart to pay an annual dividend of $0.65 per share in the coming year and to trade $50 per share at the end of the year. If investments with equivalent risk to Walmart stock have an expected return of 8%, what is the most you would pay today for Walmart stock today?

16-8

Titan Industries has 321M shares outstanding. Expects earnings in the upcoming year to total $400M. Plans to spend 25% of earnings on repurchases next year Earnings growth is expected to be 3% per year and payout rates will remain constant. Titan's cost of capital is 7%. How much is a share of Titan worth today?

8-21

What is the internal rate of return (IRR) of an investment that requires an initial investment of $300 today and pays $350 in one year?

3-35

XYZ Company expects to receive a cash flow of $1 million in 3 years. If the competitive market interest rate is fixed at 3% per year, how much can they borrow today in order to be able to repay the loan in its entirety with that cash flow?

16-6

XYZ Corp expects to pay a $0.73 dividend in one year. The firm has an equity cost of capital of 9% and expects dividends to grow at 2% per year. How much would you be willing to pay for one share of XYZ today?

3-36

You are considering investing $1000 in a CD that will pay 5% per year for 5 years. How much will the CD be worth in 5 years?

3-53

You are the lucky winner of the $10 million state lottery. You can take your prize money either as (a) 30 payments of $0.33 million per year (starting today), or (b) $5 million paid today. If the interest rate is 7%, which option should you take?

16-12

You have the opportunity to invest $20 million in a project that offers an expected payoff of $25 million next year. Based on the project's exposure to systematic risk, you estimate the appropriate discount rate to be 15%. What is the NPV of this project? What is its internal rate of return (IRR)?

3-47

You just won the lottery, and you want to endow a professorship at Tulane. You are willing to donate $2 million of your winnings for this purpose. If the university earns 5% per year on its investments, and the professor will be receiving her first payment in one year, how much will the endowment pay her each year?

8-39

You own a small piece of commercial land near a university. You are considering what to do with it. You have been approached with an offer to sell it for $200,000. You are considering two alternative business plans, opening a bar or a coffee shop. Assume you would operate the business indefinitely, eventually leaving it to your children. Bar: Invest $750,000, 𝐶_1=$75,000, 𝑔=4%, 𝑟=12%. Coffee shop: Invest $450,000, 𝐶_1=$45,000, 𝑔=3%, 𝑟=10%.

3-46

You want to finance a yearly graduation party at Tulane. You want the event to be a memorable one, so you budget $10,000 per year forever for the party. If the university earns 6% per year on its investments, and if the first party is in one year's time, how much will you need to donate to endow the party?

3-54

Your parents have made you an offer you can't refuse. They're planning to give you part of your inheritance early. They've given you a choice. They'll pay you $12,000 per year for each of the next seven years (beginning today) or they'll give you their 2011 BMW M6 Convertible, which you can sell for $68,000 (guaranteed) today. If you can earn 5% annually on your investments, which should you choose?