Question 1

A corporation has 5 million shares outstanding.Using the following information,calculate the value per share.
DCF of operations = $780m
Financial subsidiary = $60m
Employee stock options = $6m
Bonds = $333m
Securitized receivables = $3m
Operating leases = $11m
The value per share is closest to:
A)$85.4
B)$97.4
C)$99.6
D)$101.0

Accepted Answer

Value of the firm = $780m + $60m – $6m – $333m – $3m – $11m = $487m. Value per share = $487m/(5m shares) = $97.40/share

Question 2

In evaluating employee stock options,the exercise value approach provides:
A)A lower bound of valuation,and using it can undervalue the firm.
B)An upper bound of valuation,and using it can undervalue the firm.
C)A lower bound of valuation,and using it can overvalue the firm.
D)An upper bound of valuation,and using it can overvalue the firm.

Accepted Answer

C

Question 3

Which of the following is best categorized as a hybrid claim against a company as opposed to a debt equivalent?
A)Employee stock options.
B)Securitized receivables.
C)Unfunded pension liabilities.
D)Long-term operating provisions.

Accepted Answer

Employee stock options are a form of hybrid claim against a company because they give employees the right to buy company stock at a future date, which can result in ownership of the company. This is different from a debt equivalent, which would involve a company owing a specific amount of debt to a creditor. The other options listed (securitized receivables, unfunded pension liabilities, and long-term operating provisions) are more closely related to debt equivalents as they involve amounts owed by a company to creditors or employees.

Question 4

In estimating value per share of common stock of a company,for which of the following is book value a reasonable approximation for evaluating the asset or liability?
I.Excess real estate.
II.Discontinued operations.
III.Floating rate debt.
IV.Employee stock options.
A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.

Accepted Answer

Book value is a reasonable approximation for evaluating discontinued operations and floating rate debt because these are typically recorded at their fair value or close to it on the balance sheet.

Question 5

Which of the following approaches are methods for evaluating convertible debt?
I.Market value.
II.Multiples value.
III.Black-Scholes value.
IV.Conversion value.
A)I and II only.
B)I and III only.
C)I,III,and IV only.
D)II,III,and IV only.

Accepted Answer

Convertible debt can be evaluated using market value, Black-Scholes value (for the embedded option), and conversion value. Multiples value is not a standard method for evaluating convertible debt.

Question 6

Company X controls Company Y so that Company Y's financial statements are fully consolidated in the group accounts.With respect to Company X's financial statements,third-party stakes in Company Y:
A)Are not of concern.
B)Are to be deducted and are called noncontrolling interest.
C)Are to be added in and are called noncontrolling interest.
D)Are illegal.

Accepted Answer

Noncontrolling interest represents the portion of equity in a subsidiary not attributable to the parent company, which must be presented separately in the consolidated financial statements. This acknowledges the interest of third parties in the subsidiary's net assets and results.

Question 7

For equity stakes in subsidiaries where the stake is between 20 and 50 percent of the subsidiary,the holding is recorded on the balance sheet at:
A)Market value,and the parent's portion of the subsidiary's profits are shown below operating profit on the parent company's income statement.
B)Historical cost plus reinvested income,and the parent's portion of the subsidiary's profits are shown in the regular operating profit of the parent company.
C)Market value,and the parent's portion of the subsidiary's profits are shown in the regular operating profit of the parent company.
D)Historical cost plus reinvested income,and the parent's portion of the subsidiary's profits are shown below operating profit on the parent company's income statement.

Accepted Answer

When a company holds 20-50% of a subsidiary, it typically uses the equity method, recording the investment at historical cost plus the parent's share of the subsidiary's profits, which are shown below operating profit.

Question 8

Which of the following correctly lists the conditions when the multiples valuation of a subsidiary is appropriate?
A)The subsidiary is publicly traded,and the parent owns less than 20 percent of the subsidiary.
B)The subsidiary is not publicly traded,and the parent owns less than 20 percent of the subsidiary.
C)The subsidiary is publicly traded,and the parent owns between 20 percent and 50 percent of the subsidiary.
D)The subsidiary is not publicly traded,and the parent owns between 20 percent and 50 percent of the subsidiary.

Accepted Answer

The answer of Which of the following correctly lists the...

Question 9

List three alternatives to discounted cash flow (DCF )analysis when estimating the value of a subsidiary of a parent company using only the parent company's financial information,and identify the conditions when each is recommended.

Accepted Answer

The answer of List three alternatives to discounted cash flow...

Question 10

An analyst is applying an integrated-scenario approach to evaluate operations as well as equity,and the analyst essentially treats equity as a call option on the enterprise value.It is most likely the analysis is of a company that:
A)Is highly levered.
B)Has securitized receivables.
C)Uses income smoothing.
D)Has excess pension assets or liabilities.

Accepted Answer

When applying an integrated-scenario approach to evaluate operations and equity, treating equity as a call option on enterprise value is a common practice for highly levered companies. This is because in highly levered companies, the value of the equity is more sensitive to changes in enterprise value, similar to how an option's value is sensitive to changes in the underlying asset's value. Therefore, it is likely that the analysis is of a highly levered company. The other answer choices are not necessarily indicative of the use of an integrated-scenario approach or the treatment of equity as a call option.

Question 11

The multiples valuation of a subsidiary is most appropriate when the subsidiary is publicly traded and the parent owns less than 20 percent of the subsidiary.

Accepted Answer

If the company owns 20 to 50 percent of the subsidiary, then it is appropriate to use multiples valuation and apply an appropriate multiple to reported income.

Question 12

For loans to nonconsolidated subsidiaries and other companies,an analyst can estimate the asset's value by using the reported book value if the loan was made using fair market terms and if the borrower's credit risk and general interest rates have not changed significantly since the loan was made.

Accepted Answer

If the loan was made using fair market terms and if the borrower's credit risk and general interest rates have not changed significantly since the loan was made, then the reported book value can be a reliable estimate of the asset's value. However, if these conditions are not met, the analyst may need to make adjustments to the reported book value or use other methods to estimate the asset's value.

Question 13

Given the following list,put a "+" if it increases a firm's equity value or a "-" if it decreases the firm's value per share of common stock.
 Excess real estate
Preferred stock
Noncontrolling interest
Tax loss carryforward
Unfunded persion liabilities
Nonconsolidated subsidiaries

Accepted Answer

The answer of Given the following list,put a "+" if...

Question 14

Which of the following are true concerning nonoperating assets that can be converted into cash on short notice and at low cost?
I.They are classified as excess cash and marketable securities.
II.Short-term losses can be deducted directly from their value,bypassing the income statement.
III.Under International Financial Reporting Standards (IFRS),they are to be reported at fair market value on the balance sheet.
IV.Under U.S.Generally Accepted Accounting Principles (GAAP),they are to be reported at fair market value on the balance sheet.
A)I and IV only.
B)I,II,and III only.
C)I,III,and IV only.
D)III and IV only.

Accepted Answer

Nonoperating assets that can be converted into cash on short notice and at low cost are classified as excess cash and marketable securities. Short-term losses can be deducted directly from their value, bypassing the income statement. Under both International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), they are to be reported at fair market value on the balance sheet. Thus, statements I, III, and IV are true.

Question 15

Indicate in which cases book value is a reasonable approximation for evaluating the asset or liability.Answer "Yes" if book value is a reasonable approximation and "No" if it is not.
A.Floating-rate debt.
B.Outstanding bonds that are secure and actively traded.
C.Discontinued operations.
D.Stake in a publicly traded subsidiary.
E.Excess real estate.
F.Loans to nonconsolidated subsidiaries and other companies (assume interest rates and credit risk have not changed).
G.An outstanding convertible bond deep in the money.
H.Employee stock options.

Accepted Answer

The answer of Indicate in which cases book value is...

Question 16

In evaluating employee stock options,the exercise value approach provides a lower bound of valuation,and using it can overvalue the firm.

Accepted Answer

The exercise value approach only takes into account the current stock price and strike price, providing a lower bound of the value of the stock options. However, it does not consider other factors such as the volatility of the stock, the maturity of the options, and the interest rate. Ignoring these factors can lead to an overvaluation of the firm. Therefore, the exercise value approach should be used in conjunction with other valuation methods to arrive at a more accurate valuation.

Question 17

In the estimation of value process,which of the following are true concerning discontinued operations?
I.The earnings from discontinued operations are explicitly shown in the income statement.
II.The net asset position of discontinued operations is disclosed on the balance sheet.
III.For an outside analyst,the most recent book value usually serves as a good estimate of the value of discontinued operations.
IV.The value of discontinued operations should be modeled as part of free cash flow or included in the DCF value of operations.
A)I,II,and III only.
B)II and III only.
C)I and IV only.
D)I,II,III,and IV.

Accepted Answer

I is true as earnings from discontinued operations are shown separately in the income statement. II is true as the net asset position of discontinued operations is disclosed on the balance sheet. III is true to some extent as the most recent book value can serve as a starting point, but other factors like market conditions, future cash flow projections, and potential demand should also be considered. IV is not always necessary, as the value of discontinued operation can be estimated using other valuation methods such as market comparables or precedent transactions. So, only statements I, II, and III are true, making option A the correct choice.

Question 18

A corporation has 5 million shares outstanding.Using the following information,calculate the value per share. DCF of operations = $858m
Financial subsidiary = $66m
Employee stock options = $6.6m
Bonds = $366.3m
Securitized receivables = $3.3m
Operating leases = $12.1m
The value per share is closest to:
A)$97.4
B)$107.1
C)$101.0
D)$105.4

Accepted Answer

Value of the firm = $858m + $66m – $6.6m – $366.3m – $3.3m – $12.1m = $535.7m. Value per share = $535.7m/(5m shares) = $107.1/share

Quiz 14: Moving From Enterprise Value to Value Per Share

A corporation has 5 million shares outstanding.Using the following information,calculate the value per share. DCF of operations = $780m Financial subsidiary = $60m Employee stock options = $6m Bonds = $333m Securitized receivables = $3m Operating leases = $11m The value per share is closest to:

In evaluating employee stock options,the exercise value approach provides:

Which of the following is best categorized as a hybrid claim against a company as opposed to a debt equivalent?

In estimating value per share of common stock of a company,for which of the following is book value a reasonable approximation for evaluating the asset or liability? I.Excess real estate. II.Discontinued operations. III.Floating rate debt. IV.Employee stock options.

Which of the following approaches are methods for evaluating convertible debt? I.Market value. II.Multiples value. III.Black-Scholes value. IV.Conversion value.

Company X controls Company Y so that Company Y's financial statements are fully consolidated in the group accounts.With respect to Company X's financial statements,third-party stakes in Company Y:

For equity stakes in subsidiaries where the stake is between 20 and 50 percent of the subsidiary,the holding is recorded on the balance sheet at:

Which of the following correctly lists the conditions when the multiples valuation of a subsidiary is appropriate?

List three alternatives to discounted cash flow (DCF )analysis when estimating the value of a subsidiary of a parent company using only the parent company's financial information,and identify the conditions when each is recommended.

An analyst is applying an integrated-scenario approach to evaluate operations as well as equity,and the analyst essentially treats equity as a call option on the enterprise value.It is most likely the analysis is of a company that:

The multiples valuation of a subsidiary is most appropriate when the subsidiary is publicly traded and the parent owns less than 20 percent of the subsidiary.

For loans to nonconsolidated subsidiaries and other companies,an analyst can estimate the asset's value by using the reported book value if the loan was made using fair market terms and if the borrower's credit risk and general interest rates have not changed significantly since the loan was made.

Given the following list,put a "+" if it increases a firm's equity value or a "-" if it decreases the firm's value per share of common stock. Excess real estate Preferred stock Noncontrolling interest Tax loss carryforward Unfunded persion liabilities Nonconsolidated subsidiaries

In evaluating employee stock options,the exercise value approach provides a lower bound of valuation,and using it can overvalue the firm.