Homework 1-4

Merva Manufacturing expects earnings to be $3.00 per share. The industry average P/E is 15. Estimate the price of Merva’s stock.
1. $3.00
2. $15.00
3. $18.00
4. $45.00
MarketCo. Company stock has a market price of $70 per share. The company’s price-earnings ratio is currently 10. What are MarketCo. earnings per share?
1. $7
2. $60
3. $80
A firm’s free cash flow is _____.
1. FCF = EBIT x (1 - t)
2. FCF = EBIT x (1 - t) + Depreciation
3. FCF = EBIT + Depreciation - CapEx - Change in Net Working Capital
4. FCF = EBIT x (1 - t) + Depreciation - CapEx - Change in Net Working Capital
Use these numbers where the first number is in the current year and the second number is the next year. the tax rate will be 30%.
EBIT $0 & $2,000
Capital Expenditures $0 & $100
Depreciation $0 & $100
Current Assets $200 & $50
Current Liabilities $50 & $200
The change in the firm’s NWC as of t=1 is _____.
1. -500
2. -300
3. 300
4. 500
If the change in a comapny’s NWC is negative, the company has ____.
1. decreased its NWC
2. increased its NWC
3. decreased its depreciation and capital expenditures
4. increased its depreciation and capital expenditures
If the change in a company’s NWC is positive, the company has _____.
1. decreased its NWC
2. increased its NWC
3. decreased its depreciation and capital expenditures
4. increased its depreciation and capital expenditures
A firms has the following free cash flows. After year 4, the cash flows will grow at a constant rate of 2% forever. The required return is 12%. Calculate the terminal value in year 4.
Year 1, FCF is 150. Year 2, FCF is 250. Year 3, FCF is 350. Year 4, FCF is 450.
1. 3,825
2. 4,500
3. 4,590
4. 22,950
A firm has the following free cash flows. After year 4, the cash flows will grow at a constant rate of 2% forever. The required return is 12%.
Year 1, FCF is 150. Year 2, FCF is 250. Year 3, FCF is 350. Year 4, FCF is 450.
The value of the company is ______.
1. $3,728
2. $3,755
3. $3,785
4. $5,172
A firm has the following free cash flows. After year 4, the cash flows will remain at 4,000. The required return is 15%.
Year 1, FCF is 1,000. Year 2, FCF is 2,000. Year 3, FCF is 3,000. Year 4, FCF is 4,000.
The terminal value in year 4 is ____.
1. $21,888
2. $26,667
3. $30,667
4. $31,021
A firm has the following free cash flows. After year 4, the cash flows will remain at 4,000. The required return is 15%.
Year 1, FCF is 1,000. Year 2, FCF is 2,000. Year 3, FCF is 3,000. Year 4, FCF is 4,000.
The value of the company is ____.
1. $21,888
2. $26,667
3. $30,667
4. $31,021
Which of the following best explains why “value” in finance needs clarification?
1. because stakeholders perceive value differently depending on their interest
2. because every company has only one definition of value
3. because acountants and investors use the same methods
4. because book values are always equal to market values
5. because valuation concepts apply differently across contexts
Which perspective matters most for valuation in corporate finance?
1. shareholders and debtholders
2. all stakeholders equally
3. regulators
4. employees
5. customers
A pro forma statement is most closely associate with:
1. forecasted values
2. book values
3. historical accounting
4. market prices
5. past dividend history
Which is true about intrinsic value?
1. all of the above
2. it is abstract and never directly observed
3. it reflects true fundamentals
4. investors aim to estimate it
5. none of the above
The P/E ratio is commonly used in which valuation method?
1. comparable valuations
2. direct market implied valuation
3. fundamental valuation
4. liquidation
5. DCF
Which approach is least dependent on current market conditions?
1. DCF
2. Comparables
3. market implied valuation
4. price-to-book ratios
5. dividends yield method
When applying comparables, which factor is most important to ensure meaningful results?
1. using peers from the same industry
2. using companies of different size
3. including as many companies as possible, regardless of sector
4. ignoring growth rates
5. excluding public firms
what is a common criticism of comparable valuations?
1. it simply replicates market sentiment without independent analysis
2. it ignores investor expectations
3. it assumes markets are always efficient
4. it requires forecasting many years ahead
5. it is impossible to apply in practice
When might comparable be more useful than DCF?
1. when detailed cash flow forecasts are unavailable
2. when valuing distressed firms only
3. when the market is is illiquid
4. when intrinsic value is already known
5. when no peers exist
book values reflects:
1. historical costs under accounting standards
2. market expectations of the future
3. intrinsic value
4. risk-adjusted forecasts
5. analysts’ pro forma statements

Answer:

Price = EPS x P/E = 3 × 15 = 45
EPS = Price / (P/E) = 70 / 10 = 7.00
FCF = EBIT x (1 - t) + Depreciation - CapEx - Change in Net Working Capital
-300
decreased its NWC
increased its NWC
4,590. TV_4 = FCF_5 / (r-g) = 450 × 1.02/(0.12-0.02) = 4,590.00
Value = 150/(1.12) + 250/(1.12)² + 350/(1.12)³ + (450+4,590)/(1.12)^4 = 3,785.00
TV_4 = FCF_5 / (r-g) = 4,000 / 0.15 = $26,667
Value = \Sigma\left\lbrack\frac{FCF_{t}}{\left(1.14\right)^{t}}\right\rbrack+\frac{TV_4}{\left(1.14\right)^4}=21,888
because stakeholders perceive value differently depending on their interest
shareholders and debtholders
forecasted values
all of the above
comparable valuations
DCF
using peers from the same industry
it simply replicates market sentiment without independent analysis
when detailed cash flow forecasts are unavailbable
historical costs under accounting standards