# Suppose leonard, nixon, & shull corporation’s projected free cash

Question 1

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?

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O \$1,714,750

O \$1,805,000

O \$1,900,000

O \$2,000,000

O \$2,100,000

Question 2

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.

Question 3

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

Question 4

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

Question 5

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

Question 6

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 help prevent a hostile takeover.

O To help retain valued employees.

Question 7

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

Question 8

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.

Question 9

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

Question 10

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

Question 11

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. What 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

Question 12

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. What is the best estimate for the firm’s value of equity, in millions?

O \$429

O \$451

O \$475

O \$500

O \$525

Question 13

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

Question 14

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.

Question 15

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

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