Questions and Answers of Equity Asset Valuation

Donaldson Company, Inc. (NYSE: DCI) is one of the largest and most successful filtration manufacturers in the world. Consistent with FASB guidance related to segment reporting, the company has
When analysts at brokerage firms recommend a stock to the public that later performs very poorly, or when they fail to uncover negative corporate activities, they can sometimes come under public
While researching Smithson Genomics, Inc., a (fictitious) healthcare information services company, you encounter a difference of opinions. One analyst’s report claims that Smithson is at least 15
Analysts often apply asset-based valuation to natural resource companies. For example, a crude oil producer such as Petrobras (NYSE: PBR) might be valued on the basis of the market value of its
Livent, Inc. was a publicly traded theatrical production company that staged a number of smash hits such as Tony–award winning productions of Showboat and Fosse. Livent capitalized preproduction
The beta of Tasty Foods stock of 1.10 used by Rae in computing the required return on equity was based on monthly returns for the past 10 years. If Rae uses daily returns for the past 5 years, the
The total discount for both control and marketability is closest toA. 15 percent.B. 32 percent.C. 35The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
Using the excess earnings method, the value of the intangibles is closest toA. $144.0 million.B. $205.7 million.C. $338.8 million.The senior vice president of acquisitions for Northland Industries,
The guideline transaction that is most likely applicable to FAMCO isA. Firm 1.B. Firm 2.C. Firm 3.The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
The normalized earnings after tax for FAMCO is closest toA. $32,940,000.B. $34,260,000.C. $34,860,000.The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
Using an asset-based approach, the value (net of debt) of Oakstar is closest toA. $62,250,000.B. $87,250,000.C. $199,750,000.The senior vice president of acquisitions for Northland Industries, Angela
Which of the following statements concerning asset-based valuation as applied to Oakstar is most accurate? The approach is applicableA. Only when a guideline public company for the valuation is not
The indicated value of Thunder’s equity using the build-up method and the capitalized cash flow method (CCM) based on free cash flow to equity is closest toA. $29.41 million.B. $38.46 million.C.
Regarding the two statements about discount rate estimates, Chin isA. Correct with respect to adding the small stock premium and correct with respect to the weighted average cost of capital.B.
The free cash flow to the firm is closest toA. $23,031,000.B. $25,441,000.C. $36,091,000.Alan Chin, the chief executive officer of Thunder Corporation, has asked his chief financial officer,
Ebinosa can best value Thunder using theA. Excess earnings approach.B. Asset-based approach.C. Discounted free cash flow approach.Alan Chin, the chief executive officer of Thunder Corporation, has
The least likely factor that would be a source of differences in valuing Thunder compared with valuing a publicly traded company isA. Access to public debt markets.B. Agency problems.C. The size of
Given Chin’s concerns, the most appropriate definition of value for Thunder isA. Intrinsic value.B. Investment value.C. Fair market value.Alan Chin, the chief executive officer of Thunder
An appraiser has been asked to determine the combined level of valuation discounts for a small equity interest in a private company. The appraiser concluded that an appropriate control premium is 15
You have been asked to value Pacific Corporation, Inc., using an excess earnings method, given the following information:Working capital balance = $2,000,000Fair value of fixed assets =
Using the capitalized cash flow method (CCM), calculate the fair market value of 100 percent of the equity of a hypothetical company, given the following information:Current year’s reported free
Using the build-up method and assuming that no adjustment for industry risk is required, calculate an equity discount rate for a small company, given the following information:Equity risk premium =
Two companies are considering the acquisition of Target Company. Buyer A is a strategic buyer and Buyer B is a financial buyer. The following information pertains to Target Company:Sales =
Your value - oriented investment management fi rm recently hired a new analyst, Bob Westard, because of his expertise in the life sciences and biotechnology areas. At the firm’s weekly meeting,
Data for two hypothetical companies in the pharmaceutical industry, DriveMed and MAT Technology, are given in the following table. For both companies, expenditures on fixed capital and working
Define the major alternative cash flow concepts, and state one limitation of each.
Giantin Growing AG (GG) is currently selling for € 38.50, with TTM EPS and dividends per share of € 1.36 and € 0.91, respectively. The company’s P/E is 28.3, P/B is 7.1, and P/S is 2.9. The
Wilhelm MÃ¼ller, CFA, has organized the following selected data on four food companies (TTM stands for trailing 12 months):On the basis of the data given, answer the following
Aratatech is a multinational distributor of semiconductor chips and related products to businesses. Its leading competitor around the world is Trymye Electronics. Aratatech has a current market price
Discuss three types of stocks or investment situations for which an analyst could appropriately use P/B in valuation.
Tom Smithfield is valuing the stock of a food - processing business. He feels confident explicitly projecting earnings and dividends to three years (to t = 3). Other information and estimates are as
Suppose an analyst uses an equity index as a comparison asset in valuing a stock. In making a decision to recommend purchase of an individual stock, which price multiple(s) would cause concern about
You are researching the valuation of the stock of a company in the food - processing industry. Suppose you intend to use the mean value of the forward P/Es for the food - processing industry stocks
May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two hypothetical jewelry stores as of early 2009. She has the following data for Hallwhite Stores (HS) and Ruffany
An analyst plans to use P/E and the method of comparables as a basis for recommending purchasing shares of one of two peer - group companies in the business of manufacturing personal digital
As of February 2008, you are researching Jonash International, a hypothetical company subject to cyclical demand for its services. Jonash shares closed at $ 57.98 on 2 February 2007.You believe the
Boeing Company (NYSE: BA) has a current stock price of $ 49.86. It also has a P/B of 3.57 and book value per share of $ 13.97. Assume that the single - stage growth model is appropriate for valuing
Shunichi Kobayashi is valuing United Parcel Service (NYSE: UPS). Kobayashi has made the following assumptions:Book value per share is estimated at $ 9.62 on 31 December 2007.EPS will be 22 percent of
Use the following inputs and the finite horizon form of the residual income model to compute the value of Southern Trust Bank (STB) shares as of 31 December 2007:ROE will continue at 15 percent for
Dayton Manufactured Homes (DMH) builds prefabricated homes and mobile homes. Favorable demographics and the likelihood of slow, steady increases in market share should enable DMH to maintain its ROE
Retail fund manager Seymour Simms is considering the purchase of shares in upstart retailer Hot Topic Stores (HTS). The current book value of HTS is $ 20 per share, and its market price is $ 35.
Lendex Electronics (LE) had a great deal of turnover of top management for several years and was not followed by analysts during this period of turmoil. Because the company’s performance has been
Foodsco Incorporated (FI), a leading distributor of food products and materials to restaurants and other institutions, has a remarkably steady track record in terms of both return on equity and
Simonson Investment Trust International (SITI) is expected to earn $ 4.00, $ 5.00, and $ 8.00 for the next three years. SITI will pay annual dividends of $ 2.00, $ 2.50, and $ 20.50 in each of these
Notable Books (NB) is a family controlled company that dominates the retail book market. NB has book value of $ 10 per share, is expected to earn $ 2.00 forever, and pays out all of its earnings as
Protected Steel Corporation (PSC) has a book value of $ 6 per share. PSC is expected to earn $ 0.60 per share forever and pays out all of its earnings as dividends. The required rate of return on
Jim Martin is using economic value added (EVA) and market value added (MVA) to measure the performance of Sundanci. Martin uses the following fiscal year 2000 information for his analysis:Adjusted
Calculate the economic value added (EVA) or residual income, as requested, for each of the following:A. NOPAT = $ 100Beginning book value of debt = $ 200Beginning book value of equity = $ 300WACC =11
In 2007, Smithson - Williams Investments (SWI) achieved an operating profit after taxes of € 10 million on total assets of € 100 million. Half of its assets were financed with debt with a pretax
Because New Market Products (NMP) markets consumer staples, it is able to make use of considerable debt in its capital structure; specifically, 90 percent of the company’s total assets of
Palmetto Steel, Inc. (PSI) maintains a dividend payout ratio of 80 percent because of its limited opportunities for expansion. Its return on equity is 15 percent. The required rate of return on PSI
Use the following information to estimate the intrinsic value of VIM’s common stock using the residual income model:VIM had total assets of $ 3,000,000, financed with twice as much debt capital as
Based on the following information, determine whether Vertically Integrated Manufacturing (VIM) earned any residual income for its shareholders:VIM had total assets of $ 3,000,000, financed with
Smith€™s recommendation to use an FCFF model to value Holt is:A. Logical, given the prospect of Holt changing capital structure.B. Not logical because an FCFF model is used only to value
Leigh€™s comment about not considering decreases in inventory to be a source of long - term growth in free cash flow for Holt is:A. Inconsistent with a forecasting perspective.B. Mistaken
Holt€™s FCFF (in millions) for 2008 is closest to:A. $ 308.B. $ 370.C. $ 422.Ryan Leigh is preparing a presentation that analyzes the valuation of the common stock of two companies under
Do the reasons provided by Leigh support his use of the FCFE model to value Holt€™s common stock instead of using a DDM?A. Yes.B. No, because Holt€™s dividend situation argues in
Which of the following long - term FCFE growth rates is most consistent with the facts and stated policies of Emerald?A. 5 percent or lower.B. 2 percent or higher.C. 8 percent or higher.Ryan Leigh is
Clay Cooperman has valued the operating assets of Johnson Extrusion at $ 720 million. The company also has short - term cash and securities with a market value of $ 60 million that are not needed for
Lawrence McKibben is preparing a valuation of QuickChange Auto Centers, Inc. McKibben has decided to use a three - stage FCFE valuation model and the following estimates. The FCFE per share for the
SK Telecom Company is a cellular telephone paging and computer communication services company in Seoul, South Korea. The company is traded on the Korea, New York, and London stock exchanges (NYSE:
The management of Telluride, an international diversified conglomerate based in the United States, believes that the recent strong performance of its wholly owned medical supply subsidiary, Sundanci,
Bron has EPS of $ 3.00 in 2002 and expects EPS to increase by 21 percent in 2003.Earnings per share are expected to grow at a decreasing rate for the following five years, as shown in the following
An aggressive financial planner who claims to have a superior method for picking undervalued stocks is courting one of your clients. The planner claims that the best way to find the value of a stock
Kenneth McCoin is valuing McInish Corporation and performing a sensitivity analysis on his valuation. He uses a single - stage FCFE growth model. The base - case values for each of the parameters in
Watson Dunn is planning to value BCC Corporation, a provider of a variety of industrial metals and minerals. Dunn uses a single - stage FCFF approach. The financial informationDunn has assembled for
PHB Company currently sells for $ 32.50 per share. In an attempt to determine whether PHB is fairly priced, an analyst has assembled the following information:The before - tax required rates of
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has collected the following information (currency in euro):Phaneuf has net income of € 250 million,
Quinton Johnston is evaluating TMI Manufacturing Company, Ltd., which is headquartered in Taiwan. In 2008, when Johnston is performing his analysis, the company is unprofitable. Furthermore, TMI pays
Proust Company has FCFF of $ 1.7 billion and FCFE of $ 1.3 billion. Proust’s WACC is 11 percent, and its required rate of return for equity is 13 percent. FCFF is expected to grow forever at 7
The term free cash flow is frequently applied to cash flows that differ from the definition for FCFF that should be used to value a firm. Two such definitions of free cash flow are given below.
Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed here. Assume a $ 100 increase in each case and a 40 percent tax rate.A. Net income.B. Cash operating
Dobson is wondering what the consequences would be if the duration of the first stage was assumed to be 11 years instead of 8, with all the other assumptions/estimates remaining the same. Considering
Based on the third approach (the H - model), the stock isA. Undervalued.B. Fairly valued.C. Overvalued.Assorted Fund, a UK - based globally diversified equity mutual fund, is considering adding
What is the current value of the stock based on the second approach?A. C $ 16.24B. C $ 17.65C. C $ 28.29Assorted Fund, a UK - based globally diversified equity mutual fund, is considering adding
What is the terminal value of the stock based on the second approach (earnings multiple)?A. C $ 12.12B. C $ 28.29C. C $ 33.09Assorted Fund, a UK - based globally diversified equity mutual fund, is
In the first approach, what proportion of the total value of the stock is represented by the value of the second stage?A. 0.10B. 0.52C. 0.90Assorted Fund, a UK - based globally diversified equity
Leigh’s comment about not considering decreases in inventory to be a source of long -term growth in free cash flow for Holt is:A. Inconsistent with a forecasting perspective.B. Mistaken because
If Alex Renteria is correct that the current price of Tasty Foods stock is its fair value, what is expected capital gains yield on the stock?A. 3.87%B. 4.25%C. 5.30%Jacob Daniel is the chief
Alex Renteria has suggested that the market price of Tasty Foods stock is its fair value. What is the implied growth rate of dividends given the stock€™s market price? Use the required
Rae considers a security trading within a band of ± 10 percent of his estimate of intrinsic value to be within a fair value range. By that criterion, the stock of Tasty Foods isA.
What is the stock€™s justified trailing P/E based on the stock€™s value estimated by Rae?A. 5.01B. 5.24C. 5.27Jacob Daniel is the chief investment officer at a U.S. pension fund
Which of the following is closest to Rae€™s estimate of the stock€™s value?A. $ 10.08B. $ 10.54C. $ 10.62Jacob Daniel is the chief investment officer at a U.S. pension fund
Casey Hyunh is trying to value the stock of Resources Limited. To easily see how a change in one or more of her assumptions affects the estimated value of the stock, she is using a spreadsheet model.
An analyst following Chevron Corp. (NYSE Euronext: CVX) wants to estimate the sustainable growth rate for the company by using the PRAT model. For this purpose, the analyst has compiled the data in
Kazuo U to is analyzing the stock of Brother Industries, Ltd. (Tokyo Stock Exchange: 64480), a diversified Japanese company that produces a wide variety of products. Brother distributes its products
Sime Natural Cosmetics Ltd has a dividend yield of 2 percent based on the current dividend and a mature phase dividend growth rate of 5 percent per year. The current dividend growth rate is 10
You are analyzing the stock of Ansell Limited (Australian Stock Exchange: ANN), a health care company, as of late June 2008. The stock price is A $ 9.74. The company’s dividend per share for the
Mohan Gupta is the portfolio manager of an India - based equity fund. He is analyzing the value of Tata Chemicals Ltd. (Bombay Stock Exchange: TATACHEM). Tata Chemicals is India’s leading
Stellar Baking Company in Australia has a trailing P/E of 14. Analysts predict that Stellar’s dividends will continue to grow at its recent rate of 4.5 percent per year into the indefinite future.
You believe the Gordon (constant) growth model is appropriate to value the stock of Reliable Electric Corp. The company had an EPS of $ 2 in 2008. The retention ratio is 0.60. The company is expected
Maspeth Robotics shares are currently selling for € 24 and have paid a dividend of € 1 per share for the most recent year. The following additional information is given:The risk - free rate is 4
German Resources is involved in coal mining. The company is currently profitable and is expected to pay a dividend of € 4 per share next year. The company has suspended exploration, however, and
Great Plains Energy is a public utility holding company that listed its 4.5 percent cumulative perpetual preferred stock series E on the NYSE Euronext in March 1952 (Ticker: GXPPrE). The par value
During the period 1960 – 2007, earnings of the S & P 500 Index companies have increased at an average rate of 8.18 percent per year and the dividends paid have increased at an average rate of
Justin Owens is an analyst for an equity mutual fund that invests in British stocks.At the beginning of 2008, Owens is examining domestic stocks for possible inclusion in the fund. One of the stocks
Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He notices that the consensus forecast by analysts is that the stock
Amy Tanner is an analyst for a U.S. pension fund. Her supervisor has asked her to value the stocks of General Electric (NYSE: GE) and General Motors (NYSE: GM). Tanner wants to evaluate the
Which of the following statements is most accurate ? If two equity issues have the same market risk but the first issue has higher leverage, greater liquidity, and a higher required return, the
Common stock issues in this market with average systematic risk are most likely to have required rates of returnA. Between 2 percent and 7 percent.B. Between 7 and 9 percent.C. At 9 percent or

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