Circle the correct answers on m/c questions and show work on all problems.

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

equity.

c.The corporate valuation model can be used to find the value of a division.

d. An important step in applying the corporate valuation model is forecasting the firms

pro forma financial statements.

e.Free cash flows are assumed to grow at a constant rate beyond a specified date in

order to find the horizon, or terminal, value.

2. Which of the following does NOT always increase a companys 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.

3. Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

a. Abnormally high executive compensation.

b. Targeted share repurchases.

c.Shareholder rights provisions.

d. Restricted voting rights.

e. Poison pills.

4.Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. 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?

5. Suppose Yon Sun Corporations 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 firms value of operations, in millions?

6. Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be - $10 million, but its FCF at t = 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 firms value of operations, in millions?

7. A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?

Year: 1 2 3

Free cash flow: -$15 $10 $40

8. 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 for the firms value of equity, in millions?

9. Based on the corporate valuation model, the value of a companys 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 stocks price per share?

10.

Free cash flow to equity (FCFE) is calculated as

a) Net Income + Depreciation Expense Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

b) EBIT (1 T) + Depreciation Expense Capital Expenditures Change

in Working Capital Change in Other Assets.

c) Net Income + Depreciation Expense Capital Expenditures + Change

in Working Capital Principal Debt Repayments - New Debt Issues.

d) Net Income - Depreciation Expense + Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

e) EBIT (1 T) + Depreciation Expense + Capital Expenditures + Change

in Working Capital Change in Other Assets.

Operating Free cash flow (FCFF) is calculated as

a) Net Income + Depreciation Expense Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

b) EBIT (1 T) + Depreciation Expense Capital Expenditures Change

in Working Capital Change in Other Assets.

c) Net Income + Depreciation Expense Capital Expenditures + Change in

Working Capital Principal Debt Repayments - New Debt Issues.

d) Net Income - Depreciation Expense + Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

e) EBIT (1 T) + Depreciation Expense + Capital Expenditures + Change

in Working Capital Change in Other Assets.

11.

a) Net Income + Depreciation Expense Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

b) EBIT (1 T) + Depreciation Expense Capital Expenditures Change

in Working Capital Change in Other Assets.

c) Net Income + Depreciation Expense Capital Expenditures + Change in

Working Capital Principal Debt Repayments - New Debt Issues.

d) Net Income - Depreciation Expense + Capital Expenditures Change in

Working Capital Principal Debt Repayments + New Debt Issues.

e) EBIT (1 T) + Depreciation Expense + Capital Expenditures + Change

in Working Capital Change in Other Assets.

12. ___________________versus a discount rate of ____________________for an FCFE model.

The most appropriate discount rate to use when applying a FCFF valuation model is the

13. Zero had a FCFF of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 12% and WACC is 10%. If FCFF is expected to grow at 8% forever, the intrinsic value of Zero's shares are ____________. The company has zero debt and no non-operating assets.

14. Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFF in year 2 of $1.97, and per share FCFF in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8% per year. An appropriate discount rate for the stock is 11%. The stock should be worth _______ today. The company has zero debt and no non-operating assets.

15. The growth in per share FCFE of SYNK, Inc. is expected to be 8%/year for the next two years, followed by a growth rate of 4%/year for three years; after this five year period, the growth in per share FCFE is expected to be 3%/year, indefinitely. The required rate of return on SYNC, Inc. is 11%. Last year's per share FCFE was $2.75. What should the stock sell for today?