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Exam 11: Equity Valuation

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Question 31

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Todd Mountain Development Corporation is expected to pay a dividend of $3.00 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 17%. The shares of Todd Mountain Development Corporation have a beta of 0.75. Using the constant growth DDM, the intrinsic value of the shares is ________.

A) 4.00
B) 17.65
C) 37.50
D) 50.00

E) None of the above
F) B) and D)

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Question 32

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A firm has current assets which could be sold for their book value of $10 million. The book value of its fixed assets is $60 million but they could be sold for $95 million today. The firm has total debt at a book value of $40 million but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market to book ratio is ________.

A) 1.83
B) 1.50
C) 1.35
D) 1.46

E) A) and B)
F) All of the above

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Question 33

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A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

Firms with higher expected growth rates tend to have P/E ratios that are ________ the P/E ratios of firms with lower expected growth rates.

A common share pays an annual dividend per share of $1.80. The risk-free rate is 5 per cent and the risk premium for this share is 4 per cent. If the annual dividend is expected to remain at $1.80 per share, what is the value of the share?

New-economy companies generally have higher ________ than old-economy companies.

Weyerhaeuser Incorporated has a balance sheet which lists $70 million in assets, $45 million in liabilities and $25 million in common shareholders' equity. It has 1 000 000 common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is ________.

Next year's earnings are estimated to be $5.00. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

Assuming all other factors remain unchanged, ________ would increase a firm's price earnings ratio.

Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 13%. The shares of Interior Airline have a beta of 4.00. Using the constant growth DDM, the intrinsic value of the shares is ________.

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The shares of Caribou Gold Mining Corporation have a beta of -0.50. Using the constant growth DDM, the intrinsic value of the shares is ________.

A firm has a share price of $54.75 per share. The firm's earnings are $75 million and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry, most likely has ________.

Flanders Ltd has expected earnings of $4 per share for next year. The firm's ROE is 8% and its earnings retention ratio is 40%. If the firm's market capitalisation rate is 15%, what is the present value of its growth opportunities?

You are considering acquiring a common share of Sahali Shopping Centre Corporation that you would like to hold for one year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is ________ if you wanted to earn a 12% return.

Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's shares is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company shares today is ________.

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the shares. At what P/E ratio would you expect ART to sell?

A share is priced at $45. The share has earnings per share of $3.00 and a market capitalisation rate of 14%. What is the share's PVGO?

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalisation rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalisation rate?