Question 1

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? $\begin{array}{llll}
\text { Year: } & 1 & 2 & 3 \
\text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45
\end{array}$

Accepted Answer

The answer of Vasudevan Inc.forecasts the free cash flows (in...

Question 2

Which of the following best describes the condition under which an agency relationship arises?

Accepted Answer

An agency relationship arises when a principal delegates decision-making authority to another party on behalf of the firm. This can occur in various situations such as hiring managers, appointing agents to negotiate contracts or represent the company, or delegating decision-making power to an executive board. Options A and B do not involve agency relationships, and option D pertains to shareholder decision-making rather than agency relationships.

Question 3

Which of the following best describes what rate of return should be used when finding the present value of a series of cash flows?

Accepted Answer

Free cash flows should be discounted at the firm's weighted average cost of capital (WACC) to find the value of its operations. WACC considers the cost of equity, cost of debt, and their respective weights in the firm's financing structure. This reflects the total cost of capital for the firm and is the appropriate discount rate for cash flows representing the firm's operations.

Question 4

Manitoba Skate Co.'s free cash flow in the previous year was $1,250,000,and FCF is expected to grow at a constant rate of 2%.If the company's weighted average cost of capital is 17%,what is the value of its operations?

Accepted Answer

The answer of Manitoba Skate Co.'s free cash flow in...

Question 5

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?

Accepted Answer

The best estimate of the stock's price per share can be calculated by first finding the total value of the firm (including operations and short-term investments), then subtracting the value of debt and preferred stock, and finally dividing by the number of shares outstanding. The value of operations is $300 million, and there are $20 million of short-term investments, making the total value $320 million. Subtracting the debts ($50 million accounts payable, $90 million notes payable, $30 million long-term debt) and $40 million of preferred stock gives us $110 million remaining for equity. Dividing this by 10 million shares gives a price per share of $16.00.

Question 6

Suppose Toronto Corp.'s free cash flow in the previous year was $250,000,and FCF is expected to grow at a constant rate of 5%.If the company's weighted average cost of capital is 15%,what is the value of its operations?

Accepted Answer

The value of operations can be calculated using the formula for the value of a perpetuity growing at a constant rate: $ \text{Value} = \frac{\text{FCF}}{(WACC - g)} $, where FCF is the free cash flow, WACC is the weighted average cost of capital, and g is the growth rate. Plugging in the given values: $ \text{Value} = \frac{250,000}{(0.15 - 0.05)} = \frac{250,000}{0.10} = 2,500,000 $. However, the correct calculation should be $ \text{Value} = \frac{250,000}{(0.15 - 0.05)} = \frac{250,000}{0.10} = 2,500,000 \times 1.05 $ to account for the first year of growth, making the correct answer $2,625,000$.

Question 7

Suppose BC Corp.'s free cash flow in the previous year was $50,000,and FCF is expected to grow at a constant rate of 3%.If the company's weighted average cost of capital is 15%,what is the value of its operations?

Accepted Answer

The formula for the valuation of operations using the constant growth model is:

Value of Operations = Free Cash Flow / (WACC - Growth rate)

We are given that the Free Cash Flow is $50,000 and the growth rate is 3%. The WACC is 15%. So,

Value of Operations = $50,000 / (15% - 3%) = $429,167.

Therefore, the best choice is D.

Quiz 22: Corporate Valuation and Governance

Which of the following best describes the condition under which an agency relationship arises?

Which of the following best describes what rate of return should be used when finding the present value of a series of cash flows?

Manitoba Skate Co.'s free cash flow in the previous year was $1,250,000,and FCF is expected to grow at a constant rate of 2%.If the company's weighted average cost of capital is 17%,what is the value of its operations?

Suppose Toronto Corp.'s free cash flow in the previous year was $250,000,and FCF is expected to grow at a constant rate of 5%.If the company's weighted average cost of capital is 15%,what is the value of its operations?

Suppose BC Corp.'s free cash flow in the previous year was $50,000,and FCF is expected to grow at a constant rate of 3%.If the company's weighted average cost of capital is 15%,what is the value of its operations?