Chap 013

Chapter 13 - Equity Valuation
Chapter 13
Equity Valuation

Multiple Choice Questions

1. The accounting measure of a firm's equity value generated by applying accounting
principles to asset and liability acquisitions is called .
!. boo" value
#. mar"et value
C. liquidation value
$. Tobin's q

%. The price-to-sales ratio is probably most useful for firms in &hich phase of the industry life
cycle'
!. (tart up phase
#. Consolidation
C. )aturity
$. *elative decline

3. +f a firm increases its plo&bac" ratio this &ill probably result in a,n- ./E ratio.
!. higher
#. lo&er
C. unchanged
$. unable to determine

0. The value of internet companies is based primarily on .
!. current profits
#. Tobin's q
C. gro&th opportunities
$. replacement cost

13-1
1. 2e&-economy companies generally have higher than old-economy companies.
!. boo" value per share
#. ./E multiples
C. profits
$. asset values

3. ./E ratios tend to be &hen inflation is .
!. higher4 higher
#. lo&er4 lo&er
C. higher4 lo&er
$. they are unrelated

5. 6hich one of the follo&ing statements about mar"et and boo" value is correct'
!. !ll firms sell at a mar"et to boo" ratio above 1.
#. !ll firms sell at a mar"et to boo" ratio greater than or equal to 1.
C. !ll firms sell at a mar"et to boo" ratio belo& 1.
$. )ost firms have a mar"et to boo" ratio above 17 but not all.

8. Earnings yields tend to &hen Treasury yields fall.
!. fall
#. rise
C. remain unchanged
$. fluctuate &ildly

9. 6hich one of the follo&ing is a common term for the mar"et consensus value of the
required return on a stoc"'
!. $ividend payout ratio
#. +ntrinsic value
C. )ar"et capitali:ation rate
$. .lo&bac" ratio

13-%
1;. 6hich one of the follo&ing is equal to the ratio of common shareholders' equity to
common shares outstanding'
!. #oo" value per share
#. <iquidation value per share
C. )ar"et value per share
$. Tobin's =

11. ! firm has current assets &hich could be sold for their boo" value of >1; million. The
boo" value of its fi?ed assets is >3; million but they could be sold for >91 million today. The
firm has total debt at a boo" value of >0; million but interest rate changes have increased the
value of the debt to a current mar"et value of >1; million. This firm's mar"et to boo" ratio is
.
!. 1.83
#. 1.1;
C. 1.31
$. 1.03

1%. +f a stoc" is correctly priced then you "no& that .
!. the dividend payout ratio is optimal
#. the stoc"'s required return is equal to the gro&th rate in earnings and dividends
C. the sum of the stoc"'s e?pected capital gain and dividend yield is equal to the stoc"'s
required rate of return
$. the present value of gro&th opportunities is equal to the value of assets in place

13. ! stoc" has an intrinsic value of >11 and an actual stoc" price of >13.1;. @ou "no& that
this stoc" .
!. has a Tobin's = value A 1
#. &ill generate a positive alpha
C. has an e?pected return less than its required return
$. has a beta B 1

13-3
10. #ill7 Cim and (helly are all loo"ing to buy the same stoc" that pays dividends. #ill plans
on holding the stoc" for one year. Cim plans on holding the stoc" for three years. (helly plans
on holding the stoc" until she retires in 1; years. 6hich one of the follo&ing statements is
correct'
!. #ill &ill be &illing to pay the most for the stoc" because he &ill get his money bac" in one
year &hen he sells.
#. Cim should be &illing to pay three times as much for the stoc" as #ill because his e?pected
holding period is three times as long as #ill's.
C. (helly should be &illing to pay the most for the stoc" because she &ill hold it the longest
and hence she &ill get the most dividends.
$. !ll three should be &illing to pay the same amount for the stoc" regardless of their holding
period.

11. ! firm that has an *DE of 1%E is considering cutting its dividend payout. The
stoc"holders of the firm desire a dividend yield of 0E and a capital gain yield of 9E. Fiven
this information &hich of the follo&ing statement,s- is/are correct'
+. !ll else equal the firm's gro&th rate &ill accelerate after the payout change
++. !ll else equal the firm's stoc" price &ill go up after the payout change
+++. !ll else equal the firm's ./E ratio &ill increase after the payout change
!. + only
#. + and ++ only
C. ++ and +++ only
$. +7 ++ and +++

13. ! firm cuts its dividend payout ratio. !s a result you "no& that the firm's .
!. return on assets &ill increase
#. earnings retention ratio &ill increase
C. earnings gro&th rate &ill fall
$. stoc" price &ill fall

13-0
15. is the amount of money per common share that could be reali:ed by brea"ing
up the firm7 selling its assets7 repaying its debt7 and distributing the remainder to
shareholders.
$. Tobin's =

18. !n underpriced stoc" provides an e?pected return &hich is the required
return based on the capital asset pricing model ,C!.)-.
!. less than
#. equal to
C. greater than
$. greater than or equal to

19. (toc"holders of $og's * Gs .et (upply e?pect a 1%E rate of return on their stoc".
)anagement has consistently been generating a *DE of 11E over the last 1 years but no&
believes that *DE &ill be 1%E for the ne?t five years. Fiven this the firm's optimal dividend
payout ratio is no& .
!. ;E
#. 1;;E
C. bet&een ;E and 1;E
$. bet&een 1;E and 1;;E

%;. The constant gro&th dividend discount model ,$$)- can be used only &hen the
.
!. gro&th rate is less than or equal to the required return
#. gro&th rate is greater than or equal to the required return
C. gro&th rate is less than the required return
$. gro&th rate is greater than the required return

13-1
%1. (uppose that in %;;9 the e?pected dividends of the stoc"s in a broad mar"et inde? equaled
>%0; million &hen the discount rate &as 8E and the e?pected gro&th rate of the dividends
equaled 3E. Gsing the constant gro&th formula for valuation7 if interest rates increase to 9E
the value of the mar"et &ill change by .
!. -1;E
#. -%;E
C. -%1E
$. -33E

%%. @ou &ish to earn a return of 1;E on each of t&o stoc"s7 ! and #. Each of the stoc"s is
e?pected to pay a dividend of >0 in the upcoming year. The e?pected gro&th rate of dividends
is 3E for stoc" ! and 1E for stoc" #. Gsing the constant gro&th $$)7 the intrinsic value of
stoc" ! .
!. &ill be higher than the intrinsic value of stoc" #
#. &ill be the same as the intrinsic value of stoc" #
C. &ill be less than the intrinsic value of stoc" #
$. more information is necessary to ans&er this question

%3. Each of t&o stoc"s7 ! and #7 are e?pected to pay a dividend of >5 in the upcoming year.
The e?pected gro&th rate of dividends is 3E for both stoc"s. @ou require a return of 1;E on
stoc" ! and a return of 1%E on stoc" #. Gsing the constant gro&th $$)7 the intrinsic value
of stoc" ! .

%0. @ou &ish to earn a return of 11E on each of t&o stoc"s7 ! and #. (toc" ! is e?pected to
pay a dividend of >3 in the upcoming year &hile stoc" # is e?pected to pay a dividend of >%
in the upcoming year. The e?pected gro&th rate of dividends for both stoc"s is 0E. Gsing the
constant gro&th $$)7 the intrinsic value of stoc" ! .

13-3
%1. @ou are considering acquiring a common share of (ahali (hopping Center Corporation
that you &ould li"e to hold for one year. @ou e?pect to receive both >1.%1 in dividends and
>31 from the sale of the share at the end of the year. The ma?imum price you &ould pay for a
share today is if you &anted to earn a 1%E return.
!. >31.%1
#. >3%.35
C. >38.05
$. >01.3%

%3. The mar"et capitali:ation rate on the stoc" of !berdeen 6holesale Company is 1;E. +ts
e?pected *DE is 1%E and its e?pected E.( is >1.;;. +f the firm's plo&-bac" ratio is 1;E7 its
./E ratio &ill be .
!. 8.33
#. 1%.1;
C. 19.%3
$. %0.11

./E ratio &ill be .
!. 5.10
#. 10.%9
C. 13.35
$. %%.%%

%8. 6eyerhaeuser +ncorporated has a balance sheet &hich lists >5; million in assets7 >01
million in liabilities and >%1 million in common shareholders' equity. +t has 17;;;7;;;
common shares outstanding. The replacement cost of its assets is >81 million. +ts share price
in the mar"et is >09. +ts boo" value per share is .
!. >13.35
#. >%1.;;
C. >35.1;
$. >0;.83

13-5
%9. Eagle #rand !rro&heads has e?pected earnings of >1.%1 per share and a mar"et
capitali:ation rate of 1%E. Earnings are e?pected to gro& at 1E per year indefinitely. The
firm has a 0;E plo&bac" ratio. #y ho& much does the firm's *DE e?ceed the mar"et
capitali:ation rate'
!. ;.1E
#. 1.;E
C. 1.1E
$. %.;E

3;. Fagliardi 6ay Corporation has an e?pected *DE of 11E. +f it pays out 3;E of it earnings
as dividends7 its dividend gro&th rate &ill be .
!. 0.1E
#. 1;.1E
C. 11.;E
$. 3;.;E

31. ! preferred share of Coquihalla Corporation &ill pay a dividend of >8.;; in the upcoming
year7 and every year thereafter7 i.e.7 dividends are not e?pected to gro&. @ou require a return
of 5E on this stoc". Gsing the constant gro&th $$) to calculate the intrinsic value7 a
preferred share of Coquihalla Corporation is &orth .
!. >13.1;
#. >01.1;
C. >91.;;
$. >110.%9

3%. #revi" #uilders has an e?pected *DE of %1E. +ts dividend gro&th rate &ill be
if it follo&s a policy of paying 3;E of earning in the form of dividends.
!. 1.;E
#. 11.;E
C. 15.1E
$. 01.;E

13-8
33. ! firm is planning on paying its first dividend of >% after t&o years. Then dividends are
e?pected to gro& at 3E per year indefinitely. The stoc"'s required return is 10E. 6hat is the
intrinsic value of a share today'
!. >%1.;;
#. >13.85
C. >19.%0
$. >%;.99

30. *ose Hill Trading Company is e?pected to have E.( in the upcoming year of >8.;;. The
e?pected *DE is 18.;E. !n appropriate required return on the stoc" is 10E. +f the firm has a
plo&bac" ratio of 5;E7 its dividend in the upcoming year should be .
!. >1.1%
#. >1.00
C. >%.0;
$. >1.3;

plo&bac" ratio of 5;E7 its intrinsic value should be .
!. >%;.93
#. >39.55
C. >1%8.15
$. >11;.;;

33. Cache Cree" )anufacturing Company is e?pected to pay a dividend of >3.33 in the
upcoming year. $ividends are e?pected to gro& at 8E per year. The ris"free rate of return is
0E and the e?pected return on the mar"et portfolio is 10E. +nvestors use the C!.) to
compute the mar"et capitali:ation rate7 and the constant gro&th $$) to determine the value
of the stoc". The stoc"'s current price is >80.;;. Gsing the constant gro&th $$)7 the mar"et
capitali:ation rate is .
!. 9E
#. 1%E
C. 10E
$. 18E

13-9
35. Frott and .errin7 +nc. has e?pected earnings of >3 per share for ne?t year. The firm's *DE
is %;E and its earnings retention ratio is 5;E. +f the firm's mar"et capitali:ation rate is 11E7
&hat is the present value of its gro&th opportunities'
!. >%;
#. >5;
C. >9;
$. >111

38. !ce Ventura7 +nc. has e?pected earnings of >1 per share for ne?t year. The firm's *DE is
11E and its earnings retention ratio is 0;E. +f the firm's mar"et capitali:ation rate is 1;E7
!. >%1
#. >1;
C. >51
$. >1;;

39. !nnie's $onut (hops7 +nc. has e?pected earnings of >3.;; per share for ne?t year. The
firm's *DE is 18E and its earnings retention ratio is 3;E. +f the firm's mar"et capitali:ation
rate is 1%E7 &hat is the value of the firm e?cluding any gro&th opportunities'
!. >%1.;;
#. >1;.;;
C. >83.33
$. >%;8

0;. Ilanders7 +nc. has e?pected earnings of >0 per share for ne?t year. The firm's *DE is 8E
and its earnings retention ratio is 0;E. +f the firm's mar"et capitali:ation rate is 11E7 &hat is
the present value of its gro&th opportunities'
!. ->3.33
#. >;
C. >%;.30
$. >%3.35

13-1;
01. Iirm ! is high ris" and Iirm # is lo& ris". Everything else equal7 &hich firm &ould you
e?pect to have a higher ./E ratio'
!. Iirm !
#. Iirm #
C. #oth &ould have the same ./E if they &ere in the same industry
$. There is not any necessary lin"age bet&een ris" and ./E ratios

0%. Iirms &ith higher e?pected gro&th rates tend to have ./E ratios that are the
./E ratios of firms &ith lo&er e?pected gro&th rates.
!. higher than
#. equal to
C. lo&er than
$. There is not necessarily any lin"age bet&een ris" and ./E ratios

03. Value stoc"s are more li"ely to have a .EF ratio .
!. less than one
#. equal to one
C. greater than one
$. less than :ero

00. Fenerally spea"ing7 as the firm progresses through the industry life cycle you &ould
e?pect the .VFD to as a percent of share price.
!. increase
#. decrease
C. stay the same
$. no typical pattern can be e?pected

13-11
01. Cache Cree" )anufacturing Company is e?pected to pay a dividend of >0.%; in the
upcoming year. $ividends are e?pected to gro& at the rate of 8E per year. The ris"free rate of
return is 0E and the e?pected return on the mar"et portfolio is 10E. +nvestors use the C!.)
to compute the mar"et capitali:ation rate on the stoc"7 and the constant gro&th $$) to
determine the intrinsic value of the stoc". The stoc" is trading in the mar"et today at >80.;;.
Gsing the constant gro&th $$) and the C!.)7 the beta of the stoc" is .
!. 1.0
#. ;.9
C. ;.8
$. ;.1

03. 6estsyde Tool Company is e?pected to pay a dividend of >1.1; in the upcoming year.
The ris"-free rate of return is 3E and the e?pected return on the mar"et portfolio is 10E.
!nalysts e?pect the price of 6estsyde Tool Company shares to be >%9 a year from no&. The
beta of 6estsyde Tool Company's stoc" is 1.%;. Gsing the C!.)7 an appropriate required
return on 6estsyde Tool Company's stoc" is .
!. 8.;E
#. 1;.8E
C. 11.3E
$. 13.8E

05. 6estsyde Tool Company is e?pected to pay a dividend of >%.;; in the upcoming year.
The ris"-free rate of return is 3E and the e?pected return on the mar"et portfolio is 1%E.
beta of 6estsyde Tool Company's stoc" is 1.%;. Gsing a one-period valuation model7 the
intrinsic value of 6estsyde Tool Company stoc" today is .
!. >%0.%9
#. >%5.39
C. >31.13
$. >30.1%

13-1%
08. Todd )ountain development Corporation is e?pected to pay a dividend of >%.1; in the
upcoming year. $ividends are e?pected to gro& at the rate of 8E per year. The ris"-free rate
of return is 1E and the e?pected return on the mar"et portfolio is 1%E. The stoc" of Todd
)ountain $evelopment Corporation has a beta of ;.51. Gsing the C!.)7 the return you
should require on the stoc" is .
!. 5.%1E
#. 1;.%1E
C. 10.51E
$. %1.;;E

09. Todd )ountain $evelopment Corporation is e?pected to pay a dividend of >3.;; in the
of return is 1E and the e?pected return on the mar"et portfolio is 15E. The stoc" of Todd
)ountain $evelopment Corporation has a beta of ;.51. Gsing the constant gro&th $$)7 the
intrinsic value of the stoc" is .
!. 0.;;
#. 15.31
C. 35.1;
$. 1;.;;

1;. Fenerally spea"ing the higher a firm's *D! the the dividend payout ratio and
the the firm's gro&th rate of earnings.
!. higher4 lo&er
#. higher4 higher
C. lo&er4 lo&er
$. lo&er4 higher

11. +nterior !irline is e?pected to pay a dividend of >3 in the upcoming year. $ividends are
e?pected to gro& at the rate of 1;E per year. The ris"-free rate of return is 0E and the
e?pected return on the mar"et portfolio is 13E. The stoc" of +nterior !irline has a beta of
0.;;. Gsing the constant gro&th $$)7 the intrinsic value of the stoc" is .
!. >1;.;;
#. >%%.53
C. >%5.58
$. >01.35

13-13
1%. Caribou Fold )ining Corporation is e?pected to pay a dividend of >0 in the upcoming
year. $ividends are e?pected to decline at the rate of 3E per year. The ris"-free rate of return
is 1E and the e?pected return on the mar"et portfolio is 13E. The stoc" of Caribou Fold
)ining Corporation has a beta of -;.1;. Gsing the C!.)7 the return you should require on
the stoc" is .
!. %E
#. 1E
C. 8E
$. 9E

13. Caribou Fold )ining Corporation is e?pected to pay a dividend of >3 in the upcoming
)ining Corporation has a beta of -;.1;. Gsing the constant gro&th $$)7 the intrinsic value
of the stoc" is .
!. >1;.;;
#. >1;;.;;
C. >11;.;;
$. >%;;.;;

10. <ifecycle )otorcycle Company is e?pected to pay a dividend in year 1 of >%.;;7 a
dividend in year % of >3.;;7 and a dividend in year 3 of >0.;;. !fter year 37 dividends are
e?pected to gro& at the rate of 5E per year. !n appropriate required return for the stoc" is
1%E. Gsing the multistage $$)7 the stoc" should be &orth today.
!. >33.8;
#. >31.13
C. >35.91
$. >81.3;

13-10
11. !ce Irisbee Corporation produces a good that is very mature in their product life cycles.
!ce Irisbee Corporation is e?pected to pay a dividend in year 1 of >3.;;7 a dividend in year %
of >%.;;7 and a dividend in year 3 of >1.;;. !fter year 37 dividends are e?pected to decline at
the rate of %E per year. !n appropriate required return for the stoc" is 8E. Gsing the
multistage $$)7 the stoc" should be &orth today.
!. >13.;5
#. >13.18
C. >18.%1
$. >18.58

13. ! firm's earnings per share increased from >1; to >1%7 its dividends increased from >0.;;
to >0.0;7 and its share price increased from >8; to >1;;. Fiven this information7 it follo&s
that .
!. the stoc" e?perienced a drop in its ./E ratio
#. the company had a decrease in its dividend payout ratio
C. both earnings and share price increased by %;E
$. the required rate of return increased

15. !ssuming all other factors remain unchanged7 &ould increase a firm's
price/earnings ratio.
!. an increase in the dividend payout ratio
#. a reduction in investor ris" aversion
C. an e?pected increase in the level of inflation
$. an increase in the yield on treasury bills

18. ! company &ith an e?pected earnings gro&th rate &hich is greater than that of the typical
company in the same industry7 most li"ely has .
!. a dividend yield &hich is greater than that of the typical company
#. a dividend yield &hich is less than that of the typical company
C. less ris" than the typical company
$. less sensitivity to mar"et trends than the typical company

13-11
19. Everything equal7 &hich variable is negatively related to intrinsic value of a company'
!. $
1
#. $
;
C. g
$. "

3;. (anders7 +nc.7 paid a >0.;; dividend per share last year and is e?pected to continue to pay
out 3;E of its earnings as dividends for the foreseeable future. +f the firm is e?pected to
generate a 13E return on equity in the future7 and if you require a 11E return on the stoc"7 the
value of the stoc" is .
!. >%3.35
#. >31.19
C. >0%.90
$. >19.89

31. ! firm has .VFD of ; and a mar"et capitali:ation rate of 1%E. 6hat is the firm's ./E
ratio'
!. 1%.;;
#. 8.33
C. 1;.%1
$. 18.11

3%. ! firm has an earnings retention ratio of 0;E. The stoc" has a mar"et capitali:ation rate
of 11E and an *DE of 18E. 6hat is the stoc"'s ./E ratio'
!. 1%.8%
#. 5.39
C. 8.33
$. 9.03

13-13
33. ! common stoc" pays an annual dividend per share of >1.8;. The ris"-free rate is 1
percent and the ris" premium for this stoc" is 0 percent. +f the annual dividend is e?pected to
remain at >1.8; per share7 &hat is the value of the stoc"'
!. >15.58
#. >%;.;;
C. >0;.;;
$. 2one of the above

30. Transportation stoc"s currently provide an e?pected rate of return of 11E. TTT7 a large
transportation company7 &ill pay a year-end dividend of >3 per share. +f the stoc" is selling at
>3; per share7 &hat must be the mar"et's e?pectation of the constant gro&th rate of TTT
dividends'
!. 1E
#. 1;E
C. %;E

31. ! stoc" is priced at >01 per share. The stoc" has earnings per share of >3.;; and a mar"et
capitali:ation rate of 10E. 6hat is the stoc"'s .VFD'
!. >%3.15
#. >11.;;
C. >19.58
$. >%1.30

33. ! firm increases its dividend plo&bac" ratio. !ll else equal you "no& that
.
!. earnings gro&th &ill increase and the stoc"'s ./E &ill increase
#. earnings gro&th &ill decrease and the stoc"'s ./E &ill increase
C. earnings gro&th &ill increase and the stoc"'s ./E &ill decrease
$. earnings gro&th &ill increase and the stoc"'s ./E may or may not increase

13-15
35. ! firm has a stoc" price of >10.51 per share. The firm's earnings are >51 million and the
firm has %; million shares outstanding. The firm has an *DE of 11E and a plo&bac" of 31E.
6hat is the firm's .EF ratio'
!. 1.1;
#. 1.%1
C. 1.1;
$. 1.;;

!*T has come out &ith a ne& and improved product. !s a result7 the firm proJects an *DE
of %1E7 and it &ill maintain a plo&bac" ratio of ;.%;. +ts earnings this year &ill be >3 per
share. +nvestors e?pect a 1%E rate of return on the stoc".

38. !t &hat price &ould you e?pect !*T to sell'
!. >%1.;;
#. >30.%9
C. >0%.83
$. >01.35

39. !t &hat ./E ratio &ould you e?pect !*T to sell'
!. 8.33
#. 11.03
C. 10.%9
$. 11.%1

5;. 6hat is the present value of gro&th opportunities for !*T'
!. >8.15
#. >9.%9
C. >10.%9
$. >13.%9

13-18
51. 6hat price do you e?pect !*T shares to sell for in 0 years'
!. >13.93
#. >00.91
C. >01.38
$. >39.53

5%. The E#+T of a firm is >3;;7 the ta? rate is 31E7 the depreciation is >%;7 capital
e?penditures are >3; and the increase in net &or"ing capital is >3;. 6hat is the free cash flo&
to the firm'
!. >81
#. >1%1
C. >181
$. >3;1

53. ! firm reports E#+T of >1;; million. The income statement sho&s depreciation of >%;
millions. +f the ta? rate is 31E and total capital e?penditures and increases in &or"ing capital
total >1; million7 &hat is the free cash flo& to the firm'
!. >15
#. >31
C. >51
$. >91

50. The free cash flo& to the firm is >3;; million in perpetuity7 the cost of equity equals 10E
and the 6!CC is 1;E. +f the mar"et value of the debt is >1.; billion7 &hat is the value of the
equity using the free cash flo& valuation approach'
!. >1 billion
#. >% billion
C. >3 billion
$. >0 billion

13-19
51. +f a firm has a free cash flo& equal to >1; million and that cash flo& is e?pected to gro&
at 3E forever7 &hat is the total firm value given a 6!CC of 9.1E'
!. >359 million
#. >511 million
C. >539 million
$. >8;3 million

53. The free cash flo& to the firm is reported as >0;1 million. The interest e?pense to the firm
is >53 million. +f the ta? rate is 31E and the net debt of the firm increased by >1;7 &hat is the
free cash flo& to the equity holders of the firm'
!. >0;3 million
#. >010 million
C. >1;1 million
$. >113 million

55. The free cash flo& to the firm is reported as >%51 million. The interest e?pense to the firm
is >3; million. +f the ta? rate is 31E and the net debt of the firm increased by >337 &hat is the
!. >%39 million
#. >%93 million
C. >3;1 million
$. >3%5 million

58. The free cash flo& to the firm is reported as >%;1 million. The interest e?pense to the firm
is >%% million. +f the ta? rate is 31E and the net debt of the firm increased by >%17 &hat is the
mar"et value of the firm if the ICIE gro&s at %E and the cost of equity is 11E'
!. >%7138 billion
#. >%7395 billion
C. >%7131 billion
$. >%7998 billion

13-%;
59. The free cash flo& to the firm is reported as >198 million. The interest e?pense to the firm
is >11 million. +f the ta? rate is 31E and the net debt of the firm increased by >%; million7
&hat is the mar"et value of the firm if the ICIE gro&s at 3E and the cost of equity is 10E'
!. >17893 billion
#. >%7095 billion
C. >%7181 billion
$. >37;98 billion

8;. Iirm ! has a stoc" price of >31 and 3;E of the value of the stoc" is in the form of .VFD.
Iirm # also has a stoc" price of >31 but only %;E of the value of (toc" # is in the form of
.VFD. 6e "no& that .
+. (toc" ! &ill give us a higher return than (toc" #
++. an investment in (toc" ! is probably ris"ier than an investment in (toc" #
+++. (toc" ! has higher forecast earnings gro&th than (toc" #
!. + only
#. + and ++ only
C. ++ and +++ only
$. +7 ++ and +++

81. ! firm is e?pected to produce earnings ne?t year of >3.;; per share. +t plans to reinvest
%1E of its earnings at %;E. +f the cost of equity if 11E7 &hat should be the value of the
stoc"'
!. >%5.%5
#. >1;.;;
C. >33.35
$. >5;.;;

8%. 2e?t year's earnings are estimated to be >1.;;. The company plans to reinvest %;E of its
earnings at 11E. +f the cost of equity is 9E7 &hat is the present value of gro&th
opportunities'
!. >9.;9
#. >1;.1;
C. >11.11
$. >1%.%1

13-%1
83. 2e?t year's earnings are estimated to be >3.;;. The company plans to reinvest 33E of its
earnings at 1%E. +f the cost of equity is 8E7 &hat is the present value of gro&th
opportunities'
!. >3.;;
#. >%1.;;
C. >00.00
$. >51.;;

80. 6hen Foogle's share price reached >051 per share Foogle had a ./E ratio of about 38 and
an estimated mar"et capitali:ation rate of 11.1E. Foogle pays no dividends. 6hat percentage
of Foogle's stoc" price &as represented by .VFD'
!. 9%E
#. 85E
C. 55E
$. 30E

81. ! firm has a stoc" price of >11 per share and a ./E ratio of 51. +f you buy the stoc" at this
./E and earnings fail to gro& at all7 ho& long should you e?pect it to ta"e to Just recover the
cost of your investment'
!. %5 years
#. 35 years
C. 11 years
$. 51 years

83. +n &hat industry are investors li"ely to use the dividend discount model and arrive at a
price close to the observed mar"et price'
!. +mport/e?port trade
#. (oft&are
C. Telecommunications
$. Gtility

13-%%
85. Estimates of a stoc"'s intrinsic value calculated &ith the free cash flo& methodology
depends most critically on .
!. the terminal value used
#. &hether one uses ICII or ICIE
C. the time period used to estimate the cash flo&s
$. &hether the firm is currently paying dividends

88. The greatest value to an analyst from calculating a stoc"'s intrinsic value is .
!. ho& easy it is to come up &ith accurate model inputs
#. the precision of the value estimate
C. ho& the process forces analysts to understand the critical variables that have the greatest
impact on value
$. ho& all the different models typically yield identical value results

89. 6hich of the follo&ing valuation measures is often used to compare firms &hich have no
earnings'
!. .rice-to-boo" ratio
#. ./E ratio
C. .rice-to-cash flo& ratio
$. .rice-to-sales ratio

Chapter 13 Equity Valuation !ns&er Key

Multiple Choice Questions

13-%3
1. The accounting measure of a firm's equity value generated by applying accounting
principles to asset and liability acquisitions is called .
A. boo" value
#. mar"et value
C. liquidation value
$. Tobin's q

Difficulty: Easy

%. The price-to-sales ratio is probably most useful for firms in &hich phase of the industry life
cycle'
A. (tart up phase
#. Consolidation
C. )aturity
$. *elative decline

Difficulty: Easy

3. +f a firm increases its plo&bac" ratio this &ill probably result in a,n- ./E ratio.
!. higher
#. lo&er
C. unchanged
D. unable to determine

Difficulty: Medium

0. The value of internet companies is based primarily on .
!. current profits
#. Tobin's q
C. gro&th opportunities
$. replacement cost

Difficulty: Medium

13-%0
1. 2e&-economy companies generally have higher than old-economy companies.
!. boo" value per share
B. ./E multiples
C. profits
$. asset values

Difficulty: Medium

3. ./E ratios tend to be &hen inflation is .
!. higher4 higher
#. lo&er4 lo&er
C. higher4 lo&er
$. they are unrelated

Difficulty: Medium

5. 6hich one of the follo&ing statements about mar"et and boo" value is correct'
!. !ll firms sell at a mar"et to boo" ratio above 1.
#. !ll firms sell at a mar"et to boo" ratio greater than or equal to 1.
C. !ll firms sell at a mar"et to boo" ratio belo& 1.
D. )ost firms have a mar"et to boo" ratio above 17 but not all.

Difficulty: Easy

8. Earnings yields tend to &hen Treasury yields fall.
A. fall
#. rise
C. remain unchanged
$. fluctuate &ildly

Difficulty: Medium

13-%1
9. 6hich one of the follo&ing is a common term for the mar"et consensus value of the
required return on a stoc"'
!. $ividend payout ratio
#. +ntrinsic value
C. )ar"et capitali:ation rate
$. .lo&bac" ratio

Difficulty: Easy

1;. 6hich one of the follo&ing is equal to the ratio of common shareholders' equity to
common shares outstanding'
A. #oo" value per share
$. Tobin's =

Difficulty: Easy

11. ! firm has current assets &hich could be sold for their boo" value of >1; million. The
boo" value of its fi?ed assets is >3; million but they could be sold for >91 million today. The
firm has total debt at a boo" value of >0; million but interest rate changes have increased the
value of the debt to a current mar"et value of >1; million. This firm's mar"et to boo" ratio is
.
A. 1.83
#. 1.1;
C. 1.31
$. 1.03

Difficulty: Medium

13-%3
1%. +f a stoc" is correctly priced then you "no& that .
!. the dividend payout ratio is optimal
#. the stoc"'s required return is equal to the gro&th rate in earnings and dividends
C. the sum of the stoc"'s e?pected capital gain and dividend yield is equal to the stoc"'s
required rate of return
$. the present value of gro&th opportunities is equal to the value of assets in place

Difficulty: Medium

13. ! stoc" has an intrinsic value of >11 and an actual stoc" price of >13.1;. @ou "no& that
this stoc" .
!. has a Tobin's = value A 1
B. &ill generate a positive alpha
C. has an e?pected return less than its required return
$. has a beta B 1

Difficulty: Medium

10. #ill7 Cim and (helly are all loo"ing to buy the same stoc" that pays dividends. #ill plans
on holding the stoc" for one year. Cim plans on holding the stoc" for three years. (helly plans
on holding the stoc" until she retires in 1; years. 6hich one of the follo&ing statements is
correct'
!. #ill &ill be &illing to pay the most for the stoc" because he &ill get his money bac" in one
year &hen he sells.
#. Cim should be &illing to pay three times as much for the stoc" as #ill because his e?pected
holding period is three times as long as #ill's.
C. (helly should be &illing to pay the most for the stoc" because she &ill hold it the longest
and hence she &ill get the most dividends.
D. !ll three should be &illing to pay the same amount for the stoc" regardless of their holding
period.

Difficulty: Medium

13-%5
11. ! firm that has an *DE of 1%E is considering cutting its dividend payout. The
stoc"holders of the firm desire a dividend yield of 0E and a capital gain yield of 9E. Fiven
this information &hich of the follo&ing statement,s- is/are correct'
+. !ll else equal the firm's gro&th rate &ill accelerate after the payout change
++. !ll else equal the firm's stoc" price &ill go up after the payout change
+++. !ll else equal the firm's ./E ratio &ill increase after the payout change
A. + only
#. + and ++ only
C. ++ and +++ only
$. +7 ++ and +++

Difficulty: Medium

13. ! firm cuts its dividend payout ratio. !s a result you "no& that the firm's .
!. return on assets &ill increase
B. earnings retention ratio &ill increase
C. earnings gro&th rate &ill fall
$. stoc" price &ill fall

Difficulty: Easy

15. is the amount of money per common share that could be reali:ed by brea"ing
up the firm7 selling its assets7 repaying its debt7 and distributing the remainder to
shareholders.
B. <iquidation value per share
$. Tobin's =

Difficulty: Easy

13-%8
18. !n underpriced stoc" provides an e?pected return &hich is the required
return based on the capital asset pricing model ,C!.)-.
!. less than
#. equal to
C. greater than
$. greater than or equal to

Difficulty: Easy

19. (toc"holders of $og's * Gs .et (upply e?pect a 1%E rate of return on their stoc".
)anagement has consistently been generating a *DE of 11E over the last 1 years but no&
believes that *DE &ill be 1%E for the ne?t five years. Fiven this the firm's optimal dividend
payout ratio is no& .
!. ;E
B. 1;;E
C. bet&een ;E and 1;E
$. bet&een 1;E and 1;;E

Difficulty: Easy

%;. The constant gro&th dividend discount model ,$$)- can be used only &hen the
.
!. gro&th rate is less than or equal to the required return
#. gro&th rate is greater than or equal to the required return
C. gro&th rate is less than the required return
$. gro&th rate is greater than the required return

Difficulty: Easy

13-%9
%1. (uppose that in %;;9 the e?pected dividends of the stoc"s in a broad mar"et inde? equaled
>%0; million &hen the discount rate &as 8E and the e?pected gro&th rate of the dividends
equaled 3E. Gsing the constant gro&th formula for valuation7 if interest rates increase to 9E
the value of the mar"et &ill change by .
!. -1;E
#. -%;E
C. -%1E
D. -33E

Difficulty: Hard

%%. @ou &ish to earn a return of 1;E on each of t&o stoc"s7 ! and #. Each of the stoc"s is
e?pected to pay a dividend of >0 in the upcoming year. The e?pected gro&th rate of dividends
is 3E for stoc" ! and 1E for stoc" #. Gsing the constant gro&th $$)7 the intrinsic value of
stoc" ! .
A. &ill be higher than the intrinsic value of stoc" #

Difficulty: Medium

13-3;
%3. Each of t&o stoc"s7 ! and #7 are e?pected to pay a dividend of >5 in the upcoming year.
The e?pected gro&th rate of dividends is 3E for both stoc"s. @ou require a return of 1;E on
stoc" ! and a return of 1%E on stoc" #. Gsing the constant gro&th $$)7 the intrinsic value
of stoc" ! .

Difficulty: Medium

%0. @ou &ish to earn a return of 11E on each of t&o stoc"s7 ! and #. (toc" ! is e?pected to
pay a dividend of >3 in the upcoming year &hile stoc" # is e?pected to pay a dividend of >%
in the upcoming year. The e?pected gro&th rate of dividends for both stoc"s is 0E. Gsing the
constant gro&th $$)7 the intrinsic value of stoc" ! .

Difficulty: Medium

%1. @ou are considering acquiring a common share of (ahali (hopping Center Corporation
that you &ould li"e to hold for one year. @ou e?pect to receive both >1.%1 in dividends and
>31 from the sale of the share at the end of the year. The ma?imum price you &ould pay for a
share today is if you &anted to earn a 1%E return.
!. >31.%1
B. >3%.35
C. >38.05
$. >01.3%

Difficulty: Medium

13-31
./E ratio &ill be .
!. 8.33
B. 1%.1;
C. 19.%3
$. %0.11

Difficulty: Medium

./E ratio &ill be .
!. 5.10
B. 10.%9
C. 13.35
$. %%.%%

Difficulty: Medium

13-3%
%8. 6eyerhaeuser +ncorporated has a balance sheet &hich lists >5; million in assets7 >01
million in liabilities and >%1 million in common shareholders' equity. +t has 17;;;7;;;
common shares outstanding. The replacement cost of its assets is >81 million. +ts share price
in the mar"et is >09. +ts boo" value per share is .
!. >13.35
B. >%1.;;
C. >35.1;
$. >0;.83

Difficulty: Medium

%9. Eagle #rand !rro&heads has e?pected earnings of >1.%1 per share and a mar"et
capitali:ation rate of 1%E. Earnings are e?pected to gro& at 1E per year indefinitely. The
firm has a 0;E plo&bac" ratio. #y ho& much does the firm's *DE e?ceed the mar"et
capitali:ation rate'
A. ;.1E
#. 1.;E
C. 1.1E
$. %.;E
*DE L g/b L ;.;1/;.0 L 1%.1E4 " is given as 1%E so *DE - " L ;.1E

Difficulty: Medium

13-33
3;. Fagliardi 6ay Corporation has an e?pected *DE of 11E. +f it pays out 3;E of it earnings
as dividends7 its dividend gro&th rate &ill be .
!. 0.1E
B. 1;.1E
C. 11.;E
$. 3;.;E

Difficulty: Medium

31. ! preferred share of Coquihalla Corporation &ill pay a dividend of >8.;; in the upcoming
year7 and every year thereafter7 i.e.7 dividends are not e?pected to gro&. @ou require a return
of 5E on this stoc". Gsing the constant gro&th $$) to calculate the intrinsic value7 a
preferred share of Coquihalla Corporation is &orth .
!. >13.1;
#. >01.1;
C. >91.;;
D. >110.%9

Difficulty: Medium

3%. #revi" #uilders has an e?pected *DE of %1E. +ts dividend gro&th rate &ill be
if it follo&s a policy of paying 3;E of earning in the form of dividends.
!. 1.;E
#. 11.;E
C. 15.1E
$. 01.;E

Difficulty: Medium

13-30
33. ! firm is planning on paying its first dividend of >% after t&o years. Then dividends are
e?pected to gro& at 3E per year indefinitely. The stoc"'s required return is 10E. 6hat is the
intrinsic value of a share today'
!. >%1.;;
#. >13.85
C. >19.%0
$. >%;.99

Difficulty: Medium

plo&bac" ratio of 5;E7 its dividend in the upcoming year should be .
!. >1.1%
#. >1.00
C. >%.0;
$. >1.3;

Difficulty: Medium

13-31
plo&bac" ratio of 5;E7 its intrinsic value should be .
!. >%;.93
#. >39.55
C. >1%8.15
$. >11;.;;

Difficulty: Hard

33. Cache Cree" )anufacturing Company is e?pected to pay a dividend of >3.33 in the
upcoming year. $ividends are e?pected to gro& at 8E per year. The ris"free rate of return is
0E and the e?pected return on the mar"et portfolio is 10E. +nvestors use the C!.) to
compute the mar"et capitali:ation rate7 and the constant gro&th $$) to determine the value
of the stoc". The stoc"'s current price is >80.;;. Gsing the constant gro&th $$)7 the mar"et
capitali:ation rate is .
!. 9E
B. 1%E
C. 10E
$. 18E

Difficulty: Medium

13-33
35. Frott and .errin7 +nc. has e?pected earnings of >3 per share for ne?t year. The firm's *DE
is %;E and its earnings retention ratio is 5;E. +f the firm's mar"et capitali:ation rate is 11E7
!. >%;
B. >5;
C. >9;
$. >111

Difficulty: Medium

38. !ce Ventura7 +nc. has e?pected earnings of >1 per share for ne?t year. The firm's *DE is
11E and its earnings retention ratio is 0;E. +f the firm's mar"et capitali:ation rate is 1;E7
A. >%1
#. >1;
C. >51
$. >1;;

Difficulty: Medium

13-35
39. !nnie's $onut (hops7 +nc. has e?pected earnings of >3.;; per share for ne?t year. The
firm's *DE is 18E and its earnings retention ratio is 3;E. +f the firm's mar"et capitali:ation
rate is 1%E7 &hat is the value of the firm e?cluding any gro&th opportunities'
A. >%1.;;
#. >1;.;;
C. >83.33
$. >%;8

Difficulty: Medium

0;. Ilanders7 +nc. has e?pected earnings of >0 per share for ne?t year. The firm's *DE is 8E
and its earnings retention ratio is 0;E. +f the firm's mar"et capitali:ation rate is 11E7 &hat is
the present value of its gro&th opportunities'
A. ->3.33
#. >;
C. >%;.30
$. >%3.35

Difficulty: Medium

01. Iirm ! is high ris" and Iirm # is lo& ris". Everything else equal7 &hich firm &ould you
e?pect to have a higher ./E ratio'
!. Iirm !
#. Iirm #
C. #oth &ould have the same ./E if they &ere in the same industry
$. There is not any necessary lin"age bet&een ris" and ./E ratios

Difficulty: Easy

13-38
0%. Iirms &ith higher e?pected gro&th rates tend to have ./E ratios that are the
./E ratios of firms &ith lo&er e?pected gro&th rates.
A. higher than
#. equal to
C. lo&er than
$. There is not necessarily any lin"age bet&een ris" and ./E ratios

Difficulty: Easy

03. Value stoc"s are more li"ely to have a .EF ratio .
A. less than one
#. equal to one
C. greater than one
$. less than :ero

Difficulty: Medium

00. Fenerally spea"ing7 as the firm progresses through the industry life cycle you &ould
e?pect the .VFD to as a percent of share price.
!. increase
B. decrease
C. stay the same
$. no typical pattern can be e?pected

Difficulty: Medium

13-39
01. Cache Cree" )anufacturing Company is e?pected to pay a dividend of >0.%; in the
upcoming year. $ividends are e?pected to gro& at the rate of 8E per year. The ris"free rate of
return is 0E and the e?pected return on the mar"et portfolio is 10E. +nvestors use the C!.)
to compute the mar"et capitali:ation rate on the stoc"7 and the constant gro&th $$) to
determine the intrinsic value of the stoc". The stoc" is trading in the mar"et today at >80.;;.
Gsing the constant gro&th $$) and the C!.)7 the beta of the stoc" is .
!. 1.0
B. ;.9
C. ;.8
$. ;.1

Difficulty: Hard

03. 6estsyde Tool Company is e?pected to pay a dividend of >1.1; in the upcoming year.
The ris"-free rate of return is 3E and the e?pected return on the mar"et portfolio is 10E.
beta of 6estsyde Tool Company's stoc" is 1.%;. Gsing the C!.)7 an appropriate required
return on 6estsyde Tool Company's stoc" is .
!. 8.;E
#. 1;.8E
C. 11.3E
$. 13.8E

Difficulty: Medium

13-0;
05. 6estsyde Tool Company is e?pected to pay a dividend of >%.;; in the upcoming year.
The ris"-free rate of return is 3E and the e?pected return on the mar"et portfolio is 1%E.
beta of 6estsyde Tool Company's stoc" is 1.%;. Gsing a one-period valuation model7 the
intrinsic value of 6estsyde Tool Company stoc" today is .
!. >%0.%9
B. >%5.39
C. >31.13
$. >30.1%
" L ;.;3 M 1.%,;.1% - ;.;3- L ;.13%

Difficulty: Hard

08. Todd )ountain development Corporation is e?pected to pay a dividend of >%.1; in the
of return is 1E and the e?pected return on the mar"et portfolio is 1%E. The stoc" of Todd
)ountain $evelopment Corporation has a beta of ;.51. Gsing the C!.)7 the return you
should require on the stoc" is .
!. 5.%1E
B. 1;.%1E
C. 10.51E
$. %1.;;E

Difficulty: Medium

13-01
09. Todd )ountain $evelopment Corporation is e?pected to pay a dividend of >3.;; in the
of return is 1E and the e?pected return on the mar"et portfolio is 15E. The stoc" of Todd
)ountain $evelopment Corporation has a beta of ;.51. Gsing the constant gro&th $$)7 the
intrinsic value of the stoc" is .
!. 0.;;
#. 15.31
C. 35.1;
D. 1;.;;

Difficulty: Hard

1;. Fenerally spea"ing the higher a firm's *D! the the dividend payout ratio and
the the firm's gro&th rate of earnings.
!. higher4 lo&er
#. higher4 higher
C. lo&er4 lo&er
D. lo&er4 higher

Difficulty: Medium

13-0%
11. +nterior !irline is e?pected to pay a dividend of >3 in the upcoming year. $ividends are
e?pected to gro& at the rate of 1;E per year. The ris"-free rate of return is 0E and the
e?pected return on the mar"et portfolio is 13E. The stoc" of +nterior !irline has a beta of
0.;;. Gsing the constant gro&th $$)7 the intrinsic value of the stoc" is .
A. >1;.;;
#. >%%.53
C. >%5.58
$. >01.35

Difficulty: Medium

1%. Caribou Fold )ining Corporation is e?pected to pay a dividend of >0 in the upcoming
)ining Corporation has a beta of -;.1;. Gsing the C!.)7 the return you should require on
the stoc" is .
!. %E
#. 1E
C. 8E
D. 9E

Difficulty: Medium

13-03
13. Caribou Fold )ining Corporation is e?pected to pay a dividend of >3 in the upcoming
)ining Corporation has a beta of -;.1;. Gsing the constant gro&th $$)7 the intrinsic value
of the stoc" is .
A. >1;.;;
#. >1;;.;;
C. >11;.;;
$. >%;;.;;

Difficulty: Hard

10. <ifecycle )otorcycle Company is e?pected to pay a dividend in year 1 of >%.;;7 a
dividend in year % of >3.;;7 and a dividend in year 3 of >0.;;. !fter year 37 dividends are
e?pected to gro& at the rate of 5E per year. !n appropriate required return for the stoc" is
1%E. Gsing the multistage $$)7 the stoc" should be &orth today.
!. >33.8;
#. >31.13
C. >35.91
$. >81.3;

Difficulty: Hard

13-00
11. !ce Irisbee Corporation produces a good that is very mature in their product life cycles.
!ce Irisbee Corporation is e?pected to pay a dividend in year 1 of >3.;;7 a dividend in year %
of >%.;;7 and a dividend in year 3 of >1.;;. !fter year 37 dividends are e?pected to decline at
the rate of %E per year. !n appropriate required return for the stoc" is 8E. Gsing the
multistage $$)7 the stoc" should be &orth today.
A. >13.;5
#. >13.18
C. >18.%1
$. >18.58

Difficulty: Hard

13. ! firm's earnings per share increased from >1; to >1%7 its dividends increased from >0.;;
to >0.0;7 and its share price increased from >8; to >1;;. Fiven this information7 it follo&s
that .
!. the stoc" e?perienced a drop in its ./E ratio
B. the company had a decrease in its dividend payout ratio
C. both earnings and share price increased by %;E
$. the required rate of return increased

Difficulty: Medium

15. !ssuming all other factors remain unchanged7 &ould increase a firm's
price/earnings ratio.
!. an increase in the dividend payout ratio
B. a reduction in investor ris" aversion
C. an e?pected increase in the level of inflation
$. an increase in the yield on treasury bills

Difficulty: Medium

13-01
18. ! company &ith an e?pected earnings gro&th rate &hich is greater than that of the typical
company in the same industry7 most li"ely has .
!. a dividend yield &hich is greater than that of the typical company
B. a dividend yield &hich is less than that of the typical company
C. less ris" than the typical company
$. less sensitivity to mar"et trends than the typical company

Difficulty: Medium

19. Everything equal7 &hich variable is negatively related to intrinsic value of a company'
!. $
1
#. $
;
C. g
D. "

Difficulty: Medium

3;. (anders7 +nc.7 paid a >0.;; dividend per share last year and is e?pected to continue to pay
out 3;E of its earnings as dividends for the foreseeable future. +f the firm is e?pected to
generate a 13E return on equity in the future7 and if you require a 11E return on the stoc"7 the
value of the stoc" is .
!. >%3.35
#. >31.19
C. >0%.90
$. >19.89

Difficulty: Hard

13-03
31. ! firm has .VFD of ; and a mar"et capitali:ation rate of 1%E. 6hat is the firm's ./E
ratio'
!. 1%.;;
B. 8.33
C. 1;.%1
$. 18.11
. L E/" M ;4 ./E L 1/;.1% L 8.33

Difficulty: Medium

3%. ! firm has an earnings retention ratio of 0;E. The stoc" has a mar"et capitali:ation rate
of 11E and an *DE of 18E. 6hat is the stoc"'s ./E ratio'
!. 1%.8%
B. 5.39
C. 8.33
$. 9.03

Difficulty: Medium

33. ! common stoc" pays an annual dividend per share of >1.8;. The ris"-free rate is 1
percent and the ris" premium for this stoc" is 0 percent. +f the annual dividend is e?pected to
remain at >1.8; per share7 &hat is the value of the stoc"'
!. >15.58
B. >%;.;;
C. >0;.;;
. L 1.8;/.;9 L %;

Difficulty: Medium

13-05
30. Transportation stoc"s currently provide an e?pected rate of return of 11E. TTT7 a large
transportation company7 &ill pay a year-end dividend of >3 per share. +f the stoc" is selling at
>3; per share7 &hat must be the mar"et's e?pectation of the constant gro&th rate of TTT
dividends'
!. 1E
B. 1;E
C. %;E
" L $
1
/.
;
M g
.11 L 3/3; M g
g L .1;

Difficulty: Medium

31. ! stoc" is priced at >01 per share. The stoc" has earnings per share of >3.;; and a mar"et
capitali:ation rate of 10E. 6hat is the stoc"'s .VFD'
A. >%3.15
#. >11.;;
C. >19.58
$. >%1.30

Difficulty: Medium

33. ! firm increases its dividend plo&bac" ratio. !ll else equal you "no& that
.
!. earnings gro&th &ill increase and the stoc"'s ./E &ill increase
#. earnings gro&th &ill decrease and the stoc"'s ./E &ill increase
C. earnings gro&th &ill increase and the stoc"'s ./E &ill decrease
D. earnings gro&th &ill increase and the stoc"'s ./E may or may not increase

Difficulty: Medium

13-08
35. ! firm has a stoc" price of >10.51 per share. The firm's earnings are >51 million and the
firm has %; million shares outstanding. The firm has an *DE of 11E and a plo&bac" of 31E.
6hat is the firm's .EF ratio'
A. 1.1;
#. 1.%1
C. 1.1;
$. 1.;;

Difficulty: Hard

!*T has come out &ith a ne& and improved product. !s a result7 the firm proJects an *DE
of %1E7 and it &ill maintain a plo&bac" ratio of ;.%;. +ts earnings this year &ill be >3 per
share. +nvestors e?pect a 1%E rate of return on the stoc".

38. !t &hat price &ould you e?pect !*T to sell'
!. >%1.;;
B. >30.%9
C. >0%.83
$. >01.35

Difficulty: Medium

13-09
39. !t &hat ./E ratio &ould you e?pect !*T to sell'
!. 8.33
B. 11.03
C. 10.%9
$. 11.%1
./E L 30.%9/3 L 11.03

Difficulty: Medium

5;. 6hat is the present value of gro&th opportunities for !*T'
!. >8.15
B. >9.%9
C. >10.%9
$. >13.%9
.VFD L .
;
- ,E.(
;
/"- L 30.%9 - ,3/.1%- L >9.%9

Difficulty: Medium

51. 6hat price do you e?pect !*T shares to sell for in 0 years'
!. >13.93
#. >00.91
C. >01.38
$. >39.53
.
3
L .
;
,1 M g-
0
L 30.%9 ,1.;1-
0
L 01.38

Difficulty: Medium

13-1;
5%. The E#+T of a firm is >3;;7 the ta? rate is 31E7 the depreciation is >%;7 capital
e?penditures are >3; and the increase in net &or"ing capital is >3;. 6hat is the free cash flo&
to the firm'
!. >81
B. >1%1
C. >181
$. >3;1
ICII L 3;;,1 - .31- M %; - 3; - 3; L >1%1 million

Difficulty: Medium

53. ! firm reports E#+T of >1;; million. The income statement sho&s depreciation of >%;
millions. +f the ta? rate is 31E and total capital e?penditures and increases in &or"ing capital
total >1; million7 &hat is the free cash flo& to the firm'
!. >15
#. >31
C. >51
$. >91
ICII L 1;;,1 - .31- M %; - 1; L >51 million

Difficulty: Medium

50. The free cash flo& to the firm is >3;; million in perpetuity7 the cost of equity equals 10E
and the 6!CC is 1;E. +f the mar"et value of the debt is >1.; billion7 &hat is the value of the
equity using the free cash flo& valuation approach'
!. >1 billion
B. >% billion
C. >3 billion
$. >0 billion
Total value L 3;;/.1; L >3 billion. Equity value L >3 bil - 1 bil L >% billion

Difficulty: Medium

13-11
51. +f a firm has a free cash flo& equal to >1; million and that cash flo& is e?pected to gro&
at 3E forever7 &hat is the total firm value given a 6!CC of 9.1E'
!. >359 million
#. >511 million
C. >539 million
$. >8;3 million
Total value L 1;/,.;91 - .;3- L 539.%3

Difficulty: Medium

53. The free cash flo& to the firm is reported as >0;1 million. The interest e?pense to the firm
is >53 million. +f the ta? rate is 31E and the net debt of the firm increased by >1;7 &hat is the
A. >0;3 million
#. >010 million
C. >1;1 million
$. >113 million
ICIE L 0;1 - 53,1 - .31- M 1; L 0;1.3;

Difficulty: Medium

55. The free cash flo& to the firm is reported as >%51 million. The interest e?pense to the firm
is >3; million. +f the ta? rate is 31E and the net debt of the firm increased by >337 &hat is the
A. >%39 million
#. >%93 million
C. >3;1 million
$. >3%5 million
ICIE L %51 - 3;,1 - .31- M 33 L %39

Difficulty: Medium

13-1%
58. The free cash flo& to the firm is reported as >%;1 million. The interest e?pense to the firm
is >%% million. +f the ta? rate is 31E and the net debt of the firm increased by >%17 &hat is the
mar"et value of the firm if the ICIE gro&s at %E and the cost of equity is 11E'
!. >%7138 billion
B. >%7395 billion
C. >%7131 billion
$. >%7998 billion
ICIE L %;1 - %%,1 - .31- M %1 L %11.5;. Value L %11.5/,.11 - .;%- L %395.

Difficulty: Hard

59. The free cash flo& to the firm is reported as >198 million. The interest e?pense to the firm
is >11 million. +f the ta? rate is 31E and the net debt of the firm increased by >%; million7
&hat is the mar"et value of the firm if the ICIE gro&s at 3E and the cost of equity is 10E'
A. >17893 billion
#. >%7095 billion
C. >%7181 billion
$. >37;98 billion
ICIE L 198 - 11,1 - .31- M %; L %;8.%1. Value L %;8.%1/,.10 - .;3- L 1893.

Difficulty: Hard

8;. Iirm ! has a stoc" price of >31 and 3;E of the value of the stoc" is in the form of .VFD.
Iirm # also has a stoc" price of >31 but only %;E of the value of (toc" # is in the form of
.VFD. 6e "no& that .
+. (toc" ! &ill give us a higher return than (toc" #
++. an investment in (toc" ! is probably ris"ier than an investment in (toc" #
+++. (toc" ! has higher forecast earnings gro&th than (toc" #
!. + only
#. + and ++ only
C. ++ and +++ only
$. +7 ++ and +++

Difficulty: Medium

13-13
81. ! firm is e?pected to produce earnings ne?t year of >3.;; per share. +t plans to reinvest
%1E of its earnings at %;E. +f the cost of equity if 11E7 &hat should be the value of the
stoc"'
!. >%5.%5
B. >1;.;;
C. >33.35
$. >5;.;;
g L .%1 ? .%; L .;14 . L 3.;/,.11 - .;1- L 1;.;;

Difficulty: Medium

8%. 2e?t year's earnings are estimated to be >1.;;. The company plans to reinvest %;E of its
earnings at 11E. +f the cost of equity is 9E7 &hat is the present value of gro&th
opportunities'
!. >9.;9
#. >1;.1;
C. >11.11
$. >1%.%1
g L .%; ? .11 L .;34 . L 0.;/,.;9 - .;3- L 33.354 .VFD L 33.35 - ,1/.;9- L 11.11

Difficulty: Hard

83. 2e?t year's earnings are estimated to be >3.;;. The company plans to reinvest 33E of its
earnings at 1%E. +f the cost of equity is 8E7 &hat is the present value of gro&th
opportunities'
!. >3.;;
B. >%1.;;
C. >00.00
$. >51.;;
g L .33 ? .1% L .;04 . L 0.;/,.;8 - .;0- L 1;;.;;4 .VFD L 1;;.;; - ,3/.;8- L %1.;;

Difficulty: Hard

13-10
80. 6hen Foogle's share price reached >051 per share Foogle had a ./E ratio of about 38 and
an estimated mar"et capitali:ation rate of 11.1E. Foogle pays no dividends. 6hat percentage
of Foogle's stoc" price &as represented by .VFD'
!. 9%E
B. 85E
C. 55E
$. 30E

Difficulty: Hard

81. ! firm has a stoc" price of >11 per share and a ./E ratio of 51. +f you buy the stoc" at this
./E and earnings fail to gro& at all7 ho& long should you e?pect it to ta"e to Just recover the
cost of your investment'
!. %5 years
#. 35 years
C. 11 years
D. 51 years

Difficulty: Easy

83. +n &hat industry are investors li"ely to use the dividend discount model and arrive at a
price close to the observed mar"et price'
!. +mport/e?port trade
#. (oft&are
C. Telecommunications
D. Gtility

Difficulty: Easy

13-11
85. Estimates of a stoc"'s intrinsic value calculated &ith the free cash flo& methodology
depends most critically on .
A. the terminal value used
#. &hether one uses ICII or ICIE
C. the time period used to estimate the cash flo&s
$. &hether the firm is currently paying dividends

Difficulty: Easy

88. The greatest value to an analyst from calculating a stoc"'s intrinsic value is .
!. ho& easy it is to come up &ith accurate model inputs
#. the precision of the value estimate
C. ho& the process forces analysts to understand the critical variables that have the greatest
impact on value
$. ho& all the different models typically yield identical value results

Difficulty: Easy

89. 6hich of the follo&ing valuation measures is often used to compare firms &hich have no
earnings'
!. .rice-to-boo" ratio
#. ./E ratio
C. .rice-to-cash flo& ratio
D. .rice-to-sales ratio

Difficulty: Easy

13-13

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Chapter 13 - Equity Valuation

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