Identify the letter of the choice that best completes the statement or answers the question.
Problem 1. Suppose a company's most recent free cash flow (FCF) (i.e., yesterday's free cash flow) was $100 million and is expected to grow at a constant rate of 5 percent. If the company's weighted average cost of capital is 15 percent, what is the company's current Value of Operations (Vops)?
a. $1,000 million
b. $913 million
c. $1,050 million
d. $1,500 million
Problem 2. Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
a. To increase worker productivity.
b. To enable the firm to borrow at a below-market interest rate.
c. To make it easier to grant stock options to employees.
d. To help prevent a hostile takeover.
e. To help retain valued employees.
Problem 3. How is Market Value Added (MVA) determined?
a. total corporate value of firm minus value of operations
b. total book value of firm plus value of operations
c. value of operations plus marketable securities
d. total corporate value of firm minus total book value of firm
Problem 4. Which of the following provisions in a corporate charter are NOT designed to combat takeovers.
a. poison pills
b. restricted voting rights plans
c. greenmail
d. dividend policy
Problem 5. Which of the following statements about Market Value Added is incorrect?
a. MVA will decrease if Operating Profitability increases
b. MVA will increase if WACC is reduced
c. MVA will increase if Capital Requirement decreases
d. MVA will increase if sales growth occurs only if the Expected Return is greater than the Required Return.
Problem 6. A company forecasts free cash flow of $50 million in five years. It expects the free cash flow to grow at a constant rate of 6 percent thereafter. If the weighted average cost of capital is 12 percent, what is the Company's Horizon Value?
a. $883.3 million
b. $600.9 million
c. $833.3 million
d. $501.6 million
Problem 7. According to your textbook, which of the following is NOT considered to be one of the three types of assets that companies own?
a. market assets, c. assets-in-place,
b. growth options assets, d. financial assets,
Problem 8. Which of the following statements best defines EROIC?
a. The return on free-cash flows in place at the beginning of each period.
b. The return on the capital that is in place at the end of the period.
c. The return on non-operating capital that is in place at the beginning of the period.
d. The return on the capital that is in place at the beginning of the period.
Problem 9. Which of the following does NOT always increase a company's market value?
a. Increasing the expected growth rate of sales.
b. Increasing the expected operating profitability (NOPAT/Sales).
c. Decreasing the capital requirements (Capital/Sales).
d. Decreasing the weighted average cost of capital.
e. Increasing the expected rate of return on invested capital.
Problem 10. Using the Corporate Valuation Model, XYZ Company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has Marketable Securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity. What is XYZ Company's Market Value Added (MVA)?
a. $0
b. $60 million
c. $110 million
d. $40 million
Problem 11. Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?
a. $926
b. $840
c. $1,021
d. $972
e. $882
Problem 12. Consider the same situation presented in the Question #11 about Simonyan's horizon value, but assume the firm expects FCF to grow at a HIGHER constant rate of 7% after year 3, instead of 5%. How much would the horizon value change as a result of the constant growth rate increasing, Your change in the horizon value is still to be measured in millions of dollars in year 3. (All other values remain the same as in Question #12.)
a. +$587
b. +$493
c. +$115
d. -$587
e. -$493
Problem 13. Consider the same situation presented in Question #11 about Simonyan's horizon value, but assume the firm has a LOWER WACC of 8%, instead of 10%. How much would the horizon value change as a result of the decrease in the WACC, Your change in the horizon value is still to be measured in millions of dollars in year 3. (All other values remain the same as in Question #12.)
a. +$560
b. -$560
c. -$533
d. +$27
e. +$533
Problem 14. Sunrise Produce, Inc. forecasts its free cash flows (in millions) shown below. Its Weighted Average Cost of Capital (WACC) is 13%, and its FCFs are expected to continue growing at a constant rate of 5% after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the firm's value of operations (Vop) in millions for Year 0?
Year: 1 2 3
Free cash flow: -$15 $10 $40
a. $348
b. $315
c. $386
d. $367
e. $331
Problem 15. Based on the corporate valuation model, Bernile Inc.'s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of 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 of the Market Value of Equity for Bernile, in millions? (HINT: Assume that the book values of debt is close to the market values of debt.)
a. $475
b. $525
c. $429
d. $451
e. $500
Problem 16. Based on the corporate valuation model, the value of a company's operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock's price per share? (HINT: Assume that the book values of debt is close to the market values of debt.)
a. $23.00
b. $25.56
c. $28.40
d. $31.24
e. $34.36
Problem 17. Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the Value of its Operations (Vops)?
a. $1,714,750
b. $2,100,000
c. $2,000,000
d. $1,805,000
e. $1,900,000
Problem 18. CRC, Inc. forecasts that its free cash flow in the coming year (Year 1), will be -$10 million, but its FCF for Year 2 will be +$20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's Value of Operations (Vops), in millions?
a. $184
b. $167
c. $175
d. $158
e. $193
Problem 19. Based on the Corporate Valuation Model, the value of a company's operations (Vops) is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share? (HINT: Assume that the book values of debt is close to the market values of debt. Also, you will not need to use all of the values given in this problem to solve it.)
a. $24.90
b. $33.48
c. $36.82
d. $30.43
e. $27.67
Problem 20. CleanSafe, Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as they did from Year 2 to Year 3, what is the value of operations in Year 0? (Your answer should be in millions of dollars.) (HINT: You must determine the constant growth rate for the period beyond Year 3 based on the growth rate in FCF from years 2 to 3.)
Year: 1 2 3
Free cash flow: -$20 $42 $45
a. $680
b. $586
c. $617
d. $714
e. $648