Finance Chapter 9

$20 required rate of return = RF + RP x beta required rate of return = 4.00 + 5.50 x 1.50 required rate of return = 12.25% price of stock = D1 / (re-g) price of stock = 1.25/12.25-6 price of stock = $20

The Francis Company is expected to pay a dividend of D 1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.50, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price? Do not round intermediate calculations.

$40.67 year 1 = 1.75(1.22) = $2.135 year 2 = 2.135(1.22) = $2.6047

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 22% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r s) is 12%. What is the best estimate of the current stock price? Do not round intermediate calculations.

False

The corporate valuation model cannot be used unless a company pays dividends.

True

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

$125 million value of equity = total MV - Long term debt - short term debt

Based on the corporate valuation model, Wang Inc.'s total corporate value is $425 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity (in millions)?

True

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

$33.50 year 1 = 1.25(1.15) = 1.4375 year 2 = 1.4375(1.15) = 1.635125 year 3 = 1.635125(1.15) = 1.901094 D4 = 1.25(1.15)^3 (1.06) Terminal value = D4/required growth rate terminal value = 40.3032

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15.0% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (r s) is 11%, what is its current stock price? Do not round intermediate calculations.

False

If a firm's stockholders are given the preemptive right, then they can call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders must seek a change in management through a proxy fight.

The stock's price one year from now is expected to be 5% above the current price

If a stock's dividend is expected to grow at a constant rate of 5% a year, then which of the following statements is CORRECT? The stock is in equilibrium. a. The price of the stock is expected to decline in the future. b. The stock's price one year from now is expected to be 5% above the current price. c. The stock's required return must be equal to or less than 5%. d. The expected return on the stock is 5% a year. e. The stock's dividend yield is 5%.

Each stock's expected return should equal its required return as seen by the marginal investor.

If markets are in equilibrium, which of the following conditions will exist? a. Each stock's expected return should equal its realized return as seen by the marginal investor. b. The expected and required returns on stocks and bonds should be equal. c. All stocks should have the same realized return during the coming year. d. All stocks should have the same expected return as seen by the marginal investor. e. Each stock's expected return should equal its required return as seen by the marginal investor.

$2,940 total corporate value = FCF for next year / (WACC - growth rate) (210 x 1.05) / (12.5% - 5%) 220.5/7.5%

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $210 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

Stock A's expected dividend at t = 1 is only half that of Stock B.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? ABPrice $25 $25 Expected growth (constant) 10% 5% Required return 15% 15% a. Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. b. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. c. Stock A has a higher dividend yield than Stock B. d. Currently the two stocks have the same price, but over time Stock B's price will pass that of A. e. Stock A's expected dividend at t = 1 is only half that of Stock B.​

A's expected dividend is $0.75 and B's expected dividend is $1.20.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? ABPrice $25 $40 Expected growth 7% 9% Expected return 10% 12% ​ a. A's expected dividend is $0.50. b. The two stocks should have the same expected dividend. c. The two stocks could not be in equilibrium with the numbers given in the question. d. B's expected dividend is $0.75. e. A's expected dividend is $0.75 and B's expected dividend is $1.20.

If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock B's.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a. If Stock A has a higher dividend yield than Stock B, then its expected capital gains yield must be lower than Stock B's. b. Stock B must have a higher dividend yield than Stock A. c. Stock A must have a higher dividend yield than Stock B. d. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. e. If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock B's.

Stock X pays a higher dividend per share than Stock Y.

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? XYPrice $25 $25 Expected dividend yield 5% 3% Required return 12% 10% ​ a. Stock X pays a higher dividend per share than Stock Y. b. Stock Y has a lower expected growth rate than Stock X. c. Stock Y pays a higher dividend per share than Stock X. d. Stock Y has the higher expected capital gains yield. e. One year from now, Stock X should have the higher price.

True

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock. As a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.

Which of the following statements is CORRECT? a. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock. As a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. c. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. d. One of the advantages to financing with preferred stock is that 50% of the dividends paid out are tax deductible to the issuer. e. One of the disadvantages to a corporation of owning preferred stock is that 50% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds is tax free.

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

Which of the following statements is CORRECT? a. The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required returns. b. The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. c. The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. d. The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. e. If a company has two classes of common stock, Class A and Class B, then the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

The corporate valuation model discounts free cash flows by the required return on equity

Which of the following statements is NOT CORRECT? a. The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. b. An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. c. The corporate valuation model can be used to find the value of a division. d. The corporate valuation model discounts free cash flows by the required return on equity. e. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.

$26.67 value of firm = FCF year 1 / (WACC - growth rate) value of firm = 50.0 / (10% - 5%) value of firm = 1,000.00 million value of equity = 1,000.00 million - 200 million value of equity = 800 million intrinsic value per share = 800 million / 30 million intrinsic value per share = $26.67

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF 1) is expected to be $50.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations.