# 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

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? O \$1,714,750 O \$1,805,000 O \$1,900,000 O \$2,000,000 O \$2,100,000 Which of the following is NOT normally regarded as being a barrier to hostile takeovers? O Abnormally high executive compensation. O Targeted share repurchases. O Shareholder rights provisions. O Restricted voting rights. O Poison pills. Suppose Yon Sun Corporation’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? O \$948 O \$998 O \$1,050 O \$1,103 O \$1,158 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 firm’s value of operations, in millions? O \$158 O \$167 O \$175 O \$184 O \$193 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? O \$23.00 O \$25.56 O \$28.40 O \$31.24 O \$34.36 Which of the following is NOT normally regarded as being a good reason to establish an ESOP? O To increase worker productivity. O To enable the firm to borrow at a below-market interest rate. O To make it easier to grant stock options to employees. O To prevent a hostile takeover. O To retain valued employees. 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? O \$840 O \$882 O \$926 O \$972 O \$1,021 Which of the following does NOT always increase a company’s market value? O Increasing the expected growth rate of sales. O Increasing the expected operating profitability (NOPAT/Sales). O Decreasing the capital requirements (Capital/Sales). O Decreasing the weighted average cost of capital. O Increasing the expected rate of return on invested capital. Vasudevan 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 from Year 2 to Year 3, what is the Year 0 value of operations, in millions? Year: 1 2 3 Free cash flow: -\$20 \$42 \$45 O \$586 O \$617 O \$648 O \$680 O \$714 Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year: 1 2 Free cash flow: -\$50 \$100 O \$1,456 O \$1,529 O \$1,606 O \$1,686 O \$1,770 Based on the corporate valuation model, Hunsader’s value of operations is \$300 million. The balance sheet shows \$20 million of short-term investments that are unrelated to operations, \$50 million of accounts payable, \$90 million of notes payable, \$30 million of long-term debt, \$40 million of preferred stock, and \$100 million of common equity. The company has 10 million shares of stock outstanding. is the best estimate of the stock’s price per share? O \$13.72 O \$14.44 O \$15.20 O \$16.00 O \$16.80 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. is the best estimate for the firm’s value of equity, in millions? O \$429 O \$451 O \$475 O \$500 O \$525 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? O \$719 O \$757 O \$797 O \$839 O \$883 Which of the following statements is NOT CORRECT? O The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. O The corporate valuation model discounts free cash flows by the required return on equity. O The corporate valuation model can be used to find the value of a division. O An important step in applying the corporate valuation model is forecasting the firm’s pro forma financial statements. O Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. 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 O \$315 O \$331 O\$348 O \$367 O \$386