1. True or False. Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
2. You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think
a. the stock should be sold.
b. the stock is a good buy.
c. management is probably not trying to maximize the price per share.
d. dividends are not likely to be declared.
e. the stock is experiencing supernormal growth.
3. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?
a. $23.11
b. $23.70
c. $24.31
d. $24.93
e. $25.57
4. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?
Expected dividend, D1 $3.00
Current Price, P0 $50
Expected constant growth rate 6.0%
a. The stock's expected dividend yield and growth rate are equal.
b. The stock's expected dividend yield is 5%.
c. The stock's expected capital gains yield is 5%.
d. The stock's expected price 10 years from now is $100.00.
e. The stock's required return is 10%.
5. Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?
a. $719
b. $757
c. $797
d. $839
e. $883
6. Young Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?
a. $948
b. $998
c. $1,050
d. $1,103
e. $1,158
7. Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
a. $104.27
b. $106.95
c. $109.69
d. $112.50
e. $115.38