Corporate Finance Quiz 9 Solution Essay

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Weekly Quiz #9 Name ______________________________ BA 4310-001 Applied Corporate Finance October 17, 2012 QUIZ INSTRUCTIONS All questions are multiple-choice or T-F. Please circle the correct answers. You must show your work. [i]. Which of the following statements is not correct? a. The corporate valuation model can be used even for a company that does 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 pro forma financial statements. e. Free cash flows must grow at a constant rate in order to find the horizon, or terminal, value. [ii]. Which of the following is not always a way to increase the value of a company? a. Increase the growth rate of sales. b. Increase the operating profitability (NOPAT/Sales). c. Decrease the capital requirement (Capital/Sales). d. Decrease the weighted average cost of capital. e. Increase the expected return on invested capital. [iii]. Suppose a company’s projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company’s weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million? a. $530 million b. $4,545 million c. $8,333 million d. $10,000 million e. $10,600 million [iv]. A company forecasts free cash flow of $50 million in five years. It expects the free cash flow to grow at a constant rate of 6 percent thereafter. If the weighted average cost of capital is 12 percent, what is the horizon value, to the nearest million? a. $53 million b. $501 million

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