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1. 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
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2. 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
3. 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
4. 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
5. 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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