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MBA 661 Chapter 12

1. Which of the following statements is not correct?


a.
The corporate valuation model can be used even for a company that does 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 pro forma financial
statements.
e.
Free cash flows must grow at a constant rate in order to find the horizon, or terminal, value.
2. Which of the following is not a barrier to a hostile takeover?
a.
Nonpecuniary benefits.
b.
Targeted share repurchases.
c.
Shareholder rights provision.
d.
Restricted voting rights.
e.
Poison pill.
3. Suppose a companys current free cash flow is $100 million and is expected to grow at a constant rate of
5 percent. If the companys weighted average cost of capital is 15 percent, what is the current value of
operations?
a.
$ 913 million
b.
$1,000 million
c.
$1,050 million
d.
$1,500 million
e.
$2,000 million
4. A company forecasts free cash flow in one year to be -$10 million and free cash flow in two years to be
$20 million. After the second year, free cash flow will grow at a constant rate of 4 percent per year forever.
If the overall cost of capital is 14 percent, what is the current value of operations?
a.
$150 million
b.
$167 million
c.
$200 million
d.
$208 million
e.
$228 million
5. Using the corporate valuation model, the value of a companys operations is $400 million. The
companys balance sheet shows $20 million in short-term investments that are unrelated to operations. The
balance sheet also shows $50 million in accounts payable, $90 million in notes payable, $30 million in
long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company
has 10 million shares of stock, what is your best estimate for the stock price per share?
a.
$10
b.
$21
c.
$24
d.
$26
e.
$42
6. Value-based management focuses on sales growth, profitability, capital requirements, the weighted
average cost of capital, and dividend growth.
a.
True
b.
False
7. The corporate valuation model cannot be used for a company that doesnt pay dividends.
a.
True
b.
False

8. Value-based management focuses on sales growth, profitability, capital requirements, the weighted
average cost of capital, and dividend growth.
a.
True
b.
False
9. If a companys expected return on invested capital is less than its cost of equity, then the company will
always have a negative market value added (MVA).
a.
True
b.
False
10. You have obtained information for the past 2 years for the MicroShaft Corporation. Use this
information to determine FCF for 2001.
2001
2000
Sales
1200.0
1000.0
Operating Costs
1020.0
850.0
Depreciation
30.0
25.0
Earnings before income and taxes
150.0
125.0
Interest
21.7
20.2
Earnings before taxes
128.3
104.8
Taxes (40%)
51.3
41.9
Income available to common shareholders
77.0
62.9
Dividends
60.5
4.4
Cash and Equivalents
Accounts Receivable
Inventory
Net Plant and Equipment
Accounts Payable
Notes Payable
Accruals
Long term bonds
50 million Common Shares
Retained Earnings
a.
b.
c.
d.
e.

58.0
60.0
62.0
64.0
65.0

12.0
180.0
180.0
300.0
108.0
67.0
72.0
150.0
50.0
225.0

10.0
150.0
200.0
250.0
90.0
51.5
60.0
150.0
50.0
208.5

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