Finance 338: Chapter 8 Basic Stock Valuation

Hidden Technologies Inc. (HTI) is expected to generate $75 million in free cash flow next year, and it is expected to grow at a constant rate of 6% per year. The firm has no debt or preferred stock and has a WACC of 9%. HTI has 50 million shares of stock outstanding. Using the free cash flow valuation model, what is the value of the company's stock per share? A) $50.00 B) $43.33 C) $40.00 D) $45.75 E) $55.25

A) $50.00

A type of classified stock called founders' shares is owned exclusively by the firm's founders and typically provides more votes per share than other classes of common stock. A) True B) False

A) True

If a stock's price is stable, this probably means that little new information is arriving. A) True B) False

A) True

To find the firm's value of operations, discount projected free cash flows at the firm's weighted average cost of capital. A) True B) False

A) True

When stockholders assign their right to vote to another party, this is called: A) a proxy. B) a takeover. C) an ex right. D) a preemptive right. E) a privilege.

A) a proxy.

In the market multiple method, the ratio of a comparable firm's market value to a particular metric is called a: A) market multiple. B) entity multiple. C) metric multiple. D) price factor. E) EPS factor.

A) market multiple.

Which of the following inputs to the FCF valuation model is NOT a value driver? A) recent level of sales B) projected operating profitability C) capital requirements D) weighted average cost of capital E) projected sales growth rates

A) recent level of sales

Today is December 31, 2018. The following information applies to Harrison Corporation: After-tax operating income [EBIT(1 - T)] for 2019 is expected to be $950 million. The company's depreciation expense for 2019 is expected to be $190 million. The company's capital expenditures for 2019 are expected to be $380 million. No change is expected in the company's net operating working capital. The company's free cash flow is expected to grow at a constant rate of 4% per year. The company's cost of equity is 13%. The company's WACC is 9%. The market value of the company's debt is $5.2 billion. The company has no preferred stock. The company has 250 million shares of stock outstanding. Using the free cash flow valuation model, what should be the company's stock price today? A) $43.50 B) $40.00 C) $35.00 D) $37.50 E) $52.50

B) $40.00

A key point to remember is that if the ROIC is too low, managers must implement growth strategies before pursuing better capital utilization. A) True B) False

B) False

An increase in the growth rate always has a positive effect on the horizon value. A) True B) False

B) False

Classified stock refers to different types of preferred stock, which may be issued to meet special needs, such as preserving control of founding investors. A) True B) False

B) False

Large changes in the expected value drivers are required to affect incremental changes in stock prices. A) True B) False

B) False

The preemptive right is important to shareholders because it: A) is included in every corporate charter. B) protects the current shareholders against a dilution of their ownership interests. C) will result in higher dividends per share. D) allows managers to buy additional shares below the current market price. E) enables the firm to issue debt with a relatively low interest rate because the bondholders are protected.

B) protects the current shareholders against a dilution of their ownership interests.

Knoch Products forecasted earnings per share is $8.00 and the average P/E ratio for a set of similar companies is 11. Using the market multiple method, the intrinsic value of Knoch's stock is: A) $8.80 B) $1.38 C) $88.00 D) $13.80 E) $19.00

C) $88.00

The average stock's standard deviation is about: A) 15%. B) 20%. C) 30%. D) 5%. E) 10%.

C) 30%.

Using the market multiple method to estimate a target company's value, the second step is to calculate for each comparable firm the ratio of its observed market value to: A) earnings per share. B) net income. C) any metric that applies to the target firm and the comparable firms. D) sales. E) book value.

C) any metric that applies to the target firm and the comparable firms.

Petry Corporation's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 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. What is the firm's estimated value of operations? A) $1,545,500,000 B) $1,454,600,000 C) $1,300,000,000 D) $1,500,000,000 E) $1,592,600,000

D) $1,500,000,000

Which of the following statements regarding stock classes is accurate? A) Most firms have several classes of common stock. B) All common stocks, regardless of class, must have the same voting rights. C) All common stocks, regardless of class, must pay the same dividend. D) A classified stock bearing voting rights is more valuable to investors than a classified stock without voting rights, other privileges being equal. E) All common stocks fall into one of three classes: A, B, and C.

D) A classified stock bearing voting rights is more valuable to investors than a classified stock without voting rights, other privileges being equal.

A preemptive right gives stockholders the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight. True False

False

Stockholders must choose a proxy to represent them at annual meetings. True False

False

In order to prevent dilution of control or dilution of value, shareholders use preemptive rights to purchase, on a pro rata basis, any new shares issued by the firm. True False

True