Finance Exam.doc - Finance Exam Questions 1 12 1 p 147#10...

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Finance Exam Questions 1 – 12 1. p. 147, #10 Assume a market risk premium of 5.5%, and a tax rate of 40% where none are specified. You are trying to value CVS corporation, a leading chain of drugstores. You have estimated the free cash flows to equity for the firm this year to be $300 million in the current year. You anticipate that these cash flows will grow 15% a year for the next five years and 5% thereafter (forever). The firm has a cost of equity of 11% and 392 million shares outstanding. a. Estimate the total value of equity in CVS b. Estimate the value of equity per share in CVS c. If the stock is trading at $36 per share, assuming that the estimated growth rate of 15% is correct, how long would growth have to continue for the price to be justified. (You can assume that the stable growth rate remains 5%)
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2. p. 147, #11 Assume a market risk premium of 5.5%, and a tax rate of 40% where none are specified. Lear Corporation, a manufacturer of automotive supplies, generated $650 million in free cash flow to the firm (prior to debt payments but after reinvestment needs and taxes) last year. The firm has a cost of capital of 8.5% and debt outstanding of $3.88 billion. The firm has 66.5 million shares outstanding. The cash flows are expected to grow 4.5% a year in perpetuity. a. Estimate the value of Lear Corporation (as a firm) b. Estimate the value of equity in Lear Corporation. c. If the stock is trading at $32 per share, how under or overvalued is the stock?
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3. p. 221, #1 In the problems below, use a market risk premium of 5.5% for the T.Bond rate, and 8.76% for the T.Bill rate, and a tax rate of 40% where none is specified. In December 1995, Boise Cascade’s stock had a beta of 0.95. The treasury bill rate at the time was 5.8%, and the treasury bond rate was 6.4%. The firm had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate marginal tax rate was 36%.
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