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Economics
Finance
Chapter 8: Basic Stock Valuation
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Terms in this set (54)
The ____________________assumes that the value of the stock is the present value of all future dividend streams that the investor will receive up to an infinite period.
Dividend Growth Model
To calculate the stock price through the __________________, one must estimate the expected dividends during this period. Then the price of the stock at horizon date is determined and its present value has to be calculated. The price of the stock will be the sum of all these.
Non Constant Growth Model
A(n)____________________ is a document that gives one person the power to act for another, typically the power to vote shares of common stock.
Proxy
A(n)_________________ occurs when an outside group solicits stockholders' proxies in an effort to overthrow the current management.
Proxy Fight
Stockholders often have the right to purchase any additional shares sold by the firm. This right, called the ________________________, protects the present stockholders' control and prevents dilution of their value.
Preemptive Right
Although most firms have only one type of common stock in some instances ________________________ is used to meet the special needs of the company.
Classified Stock
_________________________ can help a company gain funding while maintaining the same level of control of the firm.
E.g., a firm could issue this without allowing for stockholders to gain dividends or voting rights until a certain amount of time or another milestone was reached.
Classified Stock
One type of classified stock is called _________________. This is stock owned by the firm's founders that carries sole voting rights but restricted dividends for a specified number of years.
Founders' Shares
The ______________________- estimates the total value of the firm before estimating the per share stock price, so it is called an entity valuation model.
Free Cash Flow Model
The Free Cash Flow Model estimates the total value of the firm before estimating the per share stock price, so it is called a(n)__________________.
Entity Valuation Model
The _____________________ is the present value of all the future free cash flows expected from operations when discounted at the weighted average cost of capital.
Value of Operations
______________________ include short term investments in marketable securities and noncontrolling interests in the stock of other companies.
Nonoperating Assets
The __________________ is the sum of the value of operations and the nonoperating assets
Total Intrinsic Value
The _________________ is the date when there is no need to make additional forecasts because the growth rate in sales, cash flows, and dividends is assumed to be constant thereafter. This is also called the terminal date.
Horizon Date
The ___________________ of operations is the value of operations at the end of the explicit forecast period. It is equal to the present value of all free cash flows beyond the forecast period, discounted back to the end of the forecast period at the weighted average cost of capital.
Horizon Value
The ________________ is also known as the Terminal Value or the Continuing Value.
Horizon Value
The estimated _____________________________ is the total value of the company minus the value of the debt and preferred stock.
Value of Equity
The estimated ____________ is the total value of the equity divided by the number of shares.
Intrinsic Price per Share
To estimate the ___________________:
1. Forecast the free cash flows expected during the nonconstant growth period.
2. Estimate the horizon value of operations at the end of the nonconstant growth period.
3. discount the free cash flows and estimated horizon value of operations back to the present
4. Sum these PVs to find the current estimated value of operations.
Value of Operations for a Nonconstant Growth Stock
The expected _____________________ is the expected dividend divided by the current stock price.
Dividend Yield
The expected ____________________ is the expected change in the stock price divided by the current stock price.
Capital Gains Yield
The value of a share of stock is the present value of expected future dividends when discounted at the required return on common stock.
T
The ________________________, which is also called the Gordon Growth Model, can be used when dividend growth is constant.
Constant Growth Model
The __________________ for a stock is the present value of all dividends after the horizon date discounted back to the horizon date.
Horizon Value
A(n)___________________ is one whose earnings and dividends are expected to grow much faster than the economy as a whole over some specified time period and then to grow at a sustainable long term rate.
Nonconstant Growth Stock
A(n)____________________ is similar to a no growth stock and to a share of preferred stock in the following ways:
1. All three derive their values from a series of cash inflows--coupon payments from the [answer], and dividends from both types of stock.
2. All three are assumed to have indefinite lives with no maturity value.
Perpetual Bond
Thress Industries just paid a dividend of $1.50 a share. The dividend is expected to grow 5% a year for the next three years and then 10% a year thereafter. The expected dividend per share in year 5 is $_______________.
2.10
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year. The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock is 13%. The estimated value per share of Boehm's stock is $__________________.
21.43
Woidtke Manufacturing's stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share, and the dividend is expected to grow forever at a constant rate of 10% a year. The stock price is expected to be $_____________ 1 year from now.
24.20
Woidtke Manufacturing's stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share, and the dividend is expected to grow forever at a constant rate of 10% a year. The estimted required rate of return on this stock is __________%.
(D1 / P0 ) + G
16
A company currently pays a dividend of $2 per share. It is estimated that the company's dividend will grow at a rate of 20% per year for the next 3 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.2, the risk free rate is 7.5%, and the market risk premium is 4%. The estimated current stock price of this company is $________.
NPV of cash flows (including terminal value at year 2)
50.50
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constaint rate of 5%. The weighted averagecost of capital is 12%. EMC's estimated value of operations is ____________.
Note $400,000 is year 0.
6,000,000
The Free Cash Flows Valuation Model takes into account managers' choices that change the company's operating profitability, asset utilization, or growth by observing the change in free cash flows. It also takes into account managers' choices that affect the risk of the company by measuring the change in the Weighted Average Cost of Capital.
T
A company expects a constant FCF of $240 million per year forever. If the WACC is 12%, then the value of operations is $_____________________ million
2,000
A company has a current value of operations of $800 million, and it holds $100 million in short term investments. If the company has $400 million in debt and has 10 million common share outstanding, the estimated price per share is $____________.
50
A company expects to have an FCF in 1 year of $300, which is expected to grow at a constant rate of 3% forever. If the WACC is 11%, then the value of operations is $_____________
3,750
A company's most recent free cash flow was $270. The company expects to have an FCF in 1 year of $300, which is expected to grow at a constant rate of 3% forever. If the WACC is 11%, then the value of operations is $_______________.
3,750
A company's most recent free cash flow was $500 and is expected to grow at a constant rate of 4% forever. If the WACC is 10%, then the value of operations is $___________________.
I think they divided FCF1 by Wacc - 5%.
10,400
A company expects to have an FCF at year 10 of $600, which is expected to grow at a constant rate of 4% thereafter. If the WACC is 12%, what is the value of operations at year 10?
15,600
A company expects FCF of -$10 million a tyear 1 and FCF of $20 millionat year 2; after year 2, FCF is expected to grow at a 5% rate. If the WACC is 10%, then the horizon value of operations is $_______________ million.
420
A company expects FCF of -$10 million a tyear 1 and FCF of $20 millionat year 2; after year 2, FCF is expected to grow at a 5% rate. If the WACC is 10%, then current value of operations is $___________________ million
354.55
Cathey Corporation currently has sales of $1,000, which are expected to grow by 10% from year 0 to year 1 by 4% from year 1 to year 2. The company currently has an operating profitability ratio (OP) of 7% and a capital requirement ratio (CR) of 50% and expects to maintain these ratios at their current levels. The current level of operating capital is $510.
Use these inputs to forecast free cash flow (FCF) for year 2 (Hint: you must first forecast sales, net operating profit after taxes, and total net operating capital for each year.
Answer: $_________.
58.08
Cathey Corporation has $80 in short term investments, $20 in short term debt, $140 in long term debt, $30 in preferred stock, and 10 shares of common stock outstanding. If the current value of operations is $681.25, then the intrinsic common stock price per share is $___________.
Intrinsic value of equity = total intrinsic value - All Debt - Preferred Stock.
Book doesn't agree with book.
60.13
Given:
D1 = 3.00
P0 = 50
P1 = 52
Expected Dividend Yield = _______%.
6
Given:
D1 = 3.00
P0 = 50
P1 = 52
Expected Capital Gain = _______%.
4
Given:
D1 = 3.00
P0 = 50
P1 = 52
Expected TOTAL GAIN = _______%.
10
A stock is expected to pay a dividend of $2 at the end of the year. The required rate of return is 12%. The stock's price would be $_______________ if the constant growth rate in dividends were 4%.
25
D0 is $4, the required rate of return is 9%, and growth is 5% for a constant growth stock.The stock's expected dividend yield for the coming year is ________%.
4
D0 is $4, the required rate of return is 9%, and growth is 5% for a constant growth stock.The stock's expected capital gains yield for the coming year is ________%.
5
Suppose D0 is $5 and Rs = 10%. The expected growth rate from year 0 to year 1 is 20%, the expected growth rate from year 1 to year 2 is 10%, and the constant growth rate beyond year 2 is 5%. The expected dividend for year 2 is $____________.
6.6
Suppose D0 is $5 and Rs = 10%. The expected growth rate from year 0 to year 1 is 20%, the expected growth rate from year 1 to year 2 is 10%, and the constant growth rate beyond year 2 is 5%. The expected Horizon Value price at year 2 is $___________.
138.60
Suppose D0 is $5 and Rs = 10%. The expected growth rate from year 0 to year 1 is 20%, the expected growth rate from year 1 to year 2 is 10%, and the constant growth rate beyond year 2 is 5%. The expected current price is $___________.
125.45
A preferred stock has an annual dividend of $5. The required return is 8%. The value of this stock is $___________.
62.50
A stock is trading at $80 per share. The stock is expected to have a year end dividend of $4 per share, and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 14%. The forecasted growth rate is _____________%.
9
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Verified questions
ACCOUNTING
The adjusted trial balance for Speedy Courier as of December 31, 2017, follows. $$ \begin{matrix} & \text{Debit} & \text{Credit}\\ \text{Cash} \ldots\ldots\ldots & \text{\$ 58,000}\\ \text{Accounts receivable } \ldots\ldots\ldots & \text{120,000}\\ \text{Interest receivable} \ldots\ldots\ldots & \text{7,000}\\ \text{Notes receivable (due in 90 days) } \ldots\ldots\ldots & \text{210,000}\\ \text{Office supplies } \ldots\ldots\ldots & \text{22,000}\\ \text{Trucks} \ldots\ldots\ldots & \text{134,000}\\ \text{Accumulated depreciation—Trucks} \ldots\ldots\ldots & \quad & \text{\$ 58,000}\\ \text{Equipment} \ldots\ldots\ldots & \text{270,000}\\ \text{Accumulated depreciation—Equipment} \ldots\ldots\ldots & \quad & \text{200,000}\\ \text{Land } \ldots\ldots\ldots & \text{100,000}\\ \text{Accounts payable} \ldots\ldots\ldots & \quad & \text{134,000}\\ \text{Interest payable} \ldots\ldots\ldots & \quad & \text{20,000}\\ \text{Salaries payable} \ldots\ldots\ldots & \quad & \text{28,000}\\ \text{Unearned delivery fees} \ldots\ldots\ldots & \quad & \text{120,000}\\ \text{Long-term notes payable} \ldots\ldots\ldots & \quad & \text{200,000}\\ \text{Common stock} \ldots\ldots\ldots & \quad & \text{15,000}\\ \text{Retained earnings} \ldots\ldots\ldots & \quad & \text{110,000}\\ \text{Dividends} \ldots\ldots\ldots & \text{50,000}\\ \text{Delivery fees earned} \ldots\ldots\ldots & \quad & \text{611,800}\\ \text{Interest earned} \ldots\ldots\ldots & \quad & \text{34,000}\\ \text{Depreciation expense—Trucks} \ldots\ldots\ldots & \text{29,000}\\ \text{Depreciation expense—Equipment} \ldots\ldots\ldots & \text{48,000}\\ \text{Salaries expense} \ldots\ldots\ldots & \text{74,000}\\ \text{Wages expense} \ldots\ldots\ldots & \text{300,000}\\ \text{Interest expense} \ldots\ldots\ldots & \text{15,000}\\ \text{Office supplies expense} \ldots\ldots\ldots & \text{31,000}\\ \text{Advertising expense} \ldots\ldots\ldots & \text{27,200}\\ \text{Repairs expense—Trucks} \ldots\ldots\ldots & \text{35,600}\\ \text{Totals} & \text{\$1,530,800} \ldots\ldots\ldots & \text{\$1,530,800}\\ \end{matrix} $$ 1. Use the information in the adjusted trial balance to prepare (a) the income statement for the year ended December 31, 2017, (b) the statement of retained earnings for the year ended December 31, 2017, and (c) the balance sheet as of December 31, 2017. 2. Compute the profit margin for year 2017 (use total revenues as the denominator).
ACCOUNTING
Indicate whether the following items in a bank reconciliation should be a. added to the checkbook balance. b. deducted from the checkbook balance. c. added to the bank statement balance. d. deducted from the bank statement balance. The bank statement shows a checking account balance of $5,500. There are outstanding checks totaling$600, an outstanding deposit of $400, and a bank service charge of$15. The cash account balance should be a. $5,300. b.$5,700. c. $5,285. d. none of the above.
ACCOUNTING
Candyland uses standard costing to produce a particularly popular type of candy. Candyland’s president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, “I was told by our accountants—and in fact, I have memorized—that our break even volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But here’s the strange thing: In our first year, we sold 25,000 units and indeed we broke even. than in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course … but here’s the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances … so what’s going on?!” $$ \begin{matrix} \text{Absorption Costing}\\ \text{ } & \text{2016} & \text{2017} & \text{2018}\\ \text{Sales (units)} & \text{25.000} & \text{25.000} & \text{27.500}\\ \text{Revenues} & \text{\$ 2.000.000} & \text{\$ 2.000.000} & \text{\$ 2.200.000}\\ \text{Cost of goods sold:}\\ \text{Beginning inventory} & \text{0} & \text{0} & \text{182.500}\\ \text{Production} & \text{1.825.000} & \text{2.007.500} & \text{1.825.000}\\ \text{Available for sale} & \text{1.825.000} & \text{2.007.500} & \text{2.007.500}\\ \text{Deduct ending inventory} & \text{0} & \text{(182.500)} & \text{0}\\ \text{Adjustment for production-volume variance} & \text{0} & \text{(150.000)} & \text{0}\\ \text{Cost of goods sold:} & \text{1.825.000} & \text{1.675.000} & \text{2.007.500}\\ \text{Gross margin} & \text{175.000} & \text{325.000} & \text{192.500}\\ \text{Selling and administrative expenses (all fixed)} & \text{175.000} & \text{175.000} & \text{175.000}\\ \text{Operating income} & \text{\$ 0} & \text{\$ 150.000} & \text{\$ 17.500}\\ \text{Beginning inventory} & \text{0} & \text{0} & \text{2.500}\\ \text{Production (units)} & \text{25.000} & \text{27.500} & \text{25.000}\\ \text{Sales (units)} & \text{25.000} & \text{25.000} & \text{27.500}\\ \text{Ending inventory} & \text{0} & \text{2500} & \text{0}\\ \text{Variable manufacturing cost per units} & \text{\$ 13} & \text{\$ 13} & \text{\$ 13}\\ \text{Fixed manufacturing overhead costs} & \text{\$ 1.500.000} & \text{\$ 1.500.000} & \text{\$ 1.500.000}\\ \text{Fixed manuf. costs allocated per unit produced} & \text{\$ 60} & \text{\$ 60} & \text{\$ 60}\\ \end{matrix} $$ 1. What denominator level is Candyland using to allocate fixed manufacturing costs to the candy? How is Candyland disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. 2. How did Candyland's accountants arrive at the breakeven volume of 25.000 units? 3. Prepare a variable costing-based income statement for each year. Explain the variation in variable costing operating income for each year based on contribution margin per unit and sales volume. 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack McCay the positive operating income in 2017 and the drop in operating income in 2018.
ACCOUNTING
The balance sheets for Sports Unlimited for 2018 and 2017 are provided below. $$ \text{SPORTS UNLIMITED}\\ \text{Balance Sheets}\\ \text{For the years ended December 31}\\ \begin{matrix} \text{ } & \text{2018} & \text{2017}\\ \hline \underline{\text{Assets}} & \text{ } & \text{ }\\ \text{Current assets:} & \text{ } & \text{ }\\ \text{Cash} & \text{$\$ 103,500$} & \text{$\$ 70,400$}\\ \text{Accounts receivable} & \text{$46,800$} & \text{$32,000$}\\ \text{Inventory} & \text{$44,550$} & \text{$71,200$}\\ \text{Prepaid rent} & \text{$7,200$} & \text{$3,600$}\\ \text{Long-term assets:} & \text{ } & \text{ }\\ \text{Investment in bonds} & \text{$54,900$} & \text{0}\\ \text{Land} & \text{$117,450$} & \text{$141,600$}\\ \text{Equipment} & \text{$106,200$} & \text{$102,000$}\\ \text{Less: Accumulated depreciation} & \underline{(30,600)} & \underline{(20,800)}\\ \text{Total assets} & \underline{\underline{\$ 450,000}} & \underline{\underline{\$ 400,000}}\\ \underline{\text{Liabilities and Stockholders' Equity}} & \text{ } & \text{ }\\ \text{Current liabilities:} & \text{ } & \text{ }\\ \text{Accounts payable} & \text{$\$ 30,150$} & \text{$\$ 46,800$}\\ \text{Interest payable} & \text{$7,200$} & \text{$3,600$}\\ \text{Income tax payable} & \text{$12,150$} & \text{$10,000$}\\ \text{Long-term liabilities:} & \text{ } & \text{ }\\ \text{Notes payable} & \text{$138,150$} & \text{$127,600$}\\ \text{Stockholders' equity:} & \text{ } & \text{ }\\ \text{Common stock} & \text{$144,000$} & \text{$144,000$}\\ \text{Retained earnings} & \underline{118,350} & \underline{68,000}\\ \text{Total liabilities and stockholders' equity} & \underline{\underline{\$ 450,000}} & \underline{\underline{\$ 400,000}}\\ \end{matrix} $$ 1. Prepare a vertical analysis of Sports Unlimited's 2018 and 2017 balance sheets. Express each amount as a percentage of total assets for that year. 2. Prepare a horizontal analysis of Sports Unlimited's 2018 balance sheet using 2017 as the base year.
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