HW4 - Problem Set 4 - FINA 4200 Spring 2010 Due Thursday...

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Problem Set 4 - FINA 4200 Spring 2010 Due Thursday March 18 before class I. Multiple Choices Chapter 11 1. Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate. a. True b. False 2. 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. a. True b. False 3. 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). a. True b. False 4. 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. 5. 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). 1
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d. Decreasing the weighted average cost of capital. e. Increasing the expected rate of return on invested capital. 6. 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 7. 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 8. 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. 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 9. 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
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This note was uploaded on 06/06/2011 for the course FINA 4200 taught by Professor Wu during the Spring '08 term at University of Georgia Athens.

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HW4 - Problem Set 4 - FINA 4200 Spring 2010 Due Thursday...

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