Assignment Chapter 15

True/False
Indicate whether the statement is true or false.

____ 1. The corporate valuation model cannot be used unless a company doesn't pay dividends.
____ 2. Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its
operations.
____ 3. Value-based management focuses on sales growth, profitability, capital requirements, the weighted average
cost of capital, and the dividend growth rate.
____ 4. Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO
and (2) the rules that cover the CEO's ability to remove members of the board.
____ 5. If a company's expected return on invested capital is less than its cost of equity, then the company must also
have a negative market value added (MVA).
____ 6. A poison pill is also known as a corporate restructuring.
____ 7. The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other
executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be
worthless.
____ 8. ESOPs were originally designed to help improve worker productivity, but today they are also used to help
prevent hostile takeovers.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 9. Which of the following statements is NOT CORRECT?

a. The corporate valuation model can be used both for companies that pay dividends and
those that do 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 firm's pro
forma financial statements.
e. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to
find the horizon, or terminal, value.
____ 10. Which of the following does NOT always increase a company's market value?
a. Increasing the expected growth rate of sales.
b. Increasing the expected operating profitability (NOPAT/Sales).
c. Decreasing the capital requirements (Capital/Sales).
d. Decreasing the weighted average cost of capital.
e. Increasing the expected rate of return on invested capital.
____ 11. Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
a. Abnormally high executive compensation.
b. Targeted share repurchases.
c. Shareholder rights provisions.
d. Restricted voting rights.
e. Poison pills.

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____ 12. Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
a. To increase worker productivity.
b. To enable the firm to borrow at a below-market interest rate.
c. To make it easier to grant stock options to employees.
d. To help prevent a hostile takeover.
e. To help retain valued employees.
____ 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?
a. $719
b. $757
c. $797
d. $839
e. $883
____ 14. 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?
a. $840
b. $882
c. $926
d. $972
e. $1,021
____ 15. 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?
a. $948
b. $998
c. $1,050
d. $1,103
e. $1,158
____ 16. 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?
a. $1,714,750
b. $1,805,000
c. $1,900,000
d. $2,000,000
e. $2,100,000
____ 17. 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?
a. $158
b. $167
c. $175
d. $184
e. $193

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____ 18. 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

a. $1,456
b. $1,529
c. $1,606
d. $1,686
e. $1,770
____ 19. 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

a. $315
b. $331
c. $348
d. $367
e. $386
____ 20. 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?
a. $429
b. $451
c. $475
d. $500
e. $525
____ 21. Based on the corporate valuation model, the value of a company's operations is $1,200 million. The
company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100
million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million
in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred
stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30
million shares of stock outstanding, what is the best estimate of the stock's price per share?
a. $24.90
b. $27.67
c. $30.43
d. $33.48
e. $36.82

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____ 22. 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?
a. $23.00
b. $25.56
c. $28.40
d. $31.24
e. $34.36
____ 23. 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?
a. $13.72
b. $14.44
c. $15.20
d. $16.00
e. $16.80
____ 24. 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

a. $586
b. $617
c. $648
d. $680
e. $714

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