Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 10 Stock Valuation: A Second Look
10.1 The Discounted Free Cash Flow Model
1) The discounted free cash flow model ignores interest income and expense but adjusts for
cash and debt directly, if free cash flow is calculated based on EBIT.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four
years, after which they are expected to grow at a rate of 6% per year. If the weighted
average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million,
and 30 million shares outstanding, what is Conundrum's expected terminal enterprise
value?
A) $413.4 million
B) $459.3 million
C) $505.3 million
D) $528.2 million
Answer: B
Explanation: B)
million
Diff: 2 Var: 15
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
1
Copyright © 2015 Pearson Education, Inc.
,3) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four
years, after which they are expected to grow at a rate of 5% per year. If the weighted
average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million,
and 30 million shares outstanding, what is Conundrum's expected current share price?
A) $12.61
B) $16.40
C) $20.18
D) $20.81
Answer: A
Explanation: A) FCF5 = $26 million × (1 + 0.05) = $27.3 million; V 4 = $27.3 million /
(0.11 - 0.05)
= $455.00 million; using a financial calculator, V0 = $358.36 million;
P0 = (358.36 + 85 - 65) / 30 = $12.61
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Year 1 2 3 4 5
Free Cash Flow$22 million $26 million $29 million $30 million
$32 million
General Industries is expected to generate the above free cash flows over the next five
years, after which free cash flows are expected to grow at a rate of 5% per year. If the
weighted average cost of capital is 9% and General Industries has cash of $15 million, debt
of $45 million, and 80 million shares outstanding, what is General Industries' expected
current share price?
A) $7.78
B) $8.17
C) $9.34
D) $11.67
Answer: A
Explanation: A) FCF6 = $32 million × (1 + 0.05) = $33.6 million; V 5 = $33.6 million /
(0.09 - 0.05)
= $840 million; using a financial calculator, V0 = 652.45;
P0 = $(652.45 + 15 - 45) million / 80 million = $7.78
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
Copyright © 2015 Pearson Education, Inc.
, 5) Gonzales Corporation generated free cash flow of $88 million this year. For the next two
years, the company's free cash flow is expected to grow at a rate of 10%. After that time,
the company's free cash flow is expected to level off to the industry long-term growth rate
of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation
has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is
Gonzales Corporation's expected terminal enterprise value in year 2?
A) $1384.24
B) $1245.82
C) $1107.39
D) $968.97
Answer: A
Explanation: A) FCF1 = $88 million × (1 + 0.1) = $96.8 million;
FCF2 = $88 million × = $106.48 million;
V2 = ($106.48 million × 1.04) / (0.12 - 0.04) = $1384.24 million
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6) Gonzales Corporation generated free cash flow of $81 million this year. For the next two
years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the
company's free cash flow is expected to level off to the industry long-term growth rate of
4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has
cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is
Gonzales Corporation's expected free cash flow in year 2?
A) $1429.79 million
B) $86.61 million
C) $1572.77 million
D) $96.24 million
Answer: D
Explanation: D) FCF1 = 81 × (1 + 0.09) = 88.29;
FCF2 = $81 million × = $96.2361 million
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
3
Copyright © 2015 Pearson Education, Inc.
Chapter 10 Stock Valuation: A Second Look
10.1 The Discounted Free Cash Flow Model
1) The discounted free cash flow model ignores interest income and expense but adjusts for
cash and debt directly, if free cash flow is calculated based on EBIT.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four
years, after which they are expected to grow at a rate of 6% per year. If the weighted
average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million,
and 30 million shares outstanding, what is Conundrum's expected terminal enterprise
value?
A) $413.4 million
B) $459.3 million
C) $505.3 million
D) $528.2 million
Answer: B
Explanation: B)
million
Diff: 2 Var: 15
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
1
Copyright © 2015 Pearson Education, Inc.
,3) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four
years, after which they are expected to grow at a rate of 5% per year. If the weighted
average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million,
and 30 million shares outstanding, what is Conundrum's expected current share price?
A) $12.61
B) $16.40
C) $20.18
D) $20.81
Answer: A
Explanation: A) FCF5 = $26 million × (1 + 0.05) = $27.3 million; V 4 = $27.3 million /
(0.11 - 0.05)
= $455.00 million; using a financial calculator, V0 = $358.36 million;
P0 = (358.36 + 85 - 65) / 30 = $12.61
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Year 1 2 3 4 5
Free Cash Flow$22 million $26 million $29 million $30 million
$32 million
General Industries is expected to generate the above free cash flows over the next five
years, after which free cash flows are expected to grow at a rate of 5% per year. If the
weighted average cost of capital is 9% and General Industries has cash of $15 million, debt
of $45 million, and 80 million shares outstanding, what is General Industries' expected
current share price?
A) $7.78
B) $8.17
C) $9.34
D) $11.67
Answer: A
Explanation: A) FCF6 = $32 million × (1 + 0.05) = $33.6 million; V 5 = $33.6 million /
(0.09 - 0.05)
= $840 million; using a financial calculator, V0 = 652.45;
P0 = $(652.45 + 15 - 45) million / 80 million = $7.78
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
Copyright © 2015 Pearson Education, Inc.
, 5) Gonzales Corporation generated free cash flow of $88 million this year. For the next two
years, the company's free cash flow is expected to grow at a rate of 10%. After that time,
the company's free cash flow is expected to level off to the industry long-term growth rate
of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation
has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is
Gonzales Corporation's expected terminal enterprise value in year 2?
A) $1384.24
B) $1245.82
C) $1107.39
D) $968.97
Answer: A
Explanation: A) FCF1 = $88 million × (1 + 0.1) = $96.8 million;
FCF2 = $88 million × = $106.48 million;
V2 = ($106.48 million × 1.04) / (0.12 - 0.04) = $1384.24 million
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6) Gonzales Corporation generated free cash flow of $81 million this year. For the next two
years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the
company's free cash flow is expected to level off to the industry long-term growth rate of
4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has
cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is
Gonzales Corporation's expected free cash flow in year 2?
A) $1429.79 million
B) $86.61 million
C) $1572.77 million
D) $96.24 million
Answer: D
Explanation: D) FCF1 = 81 × (1 + 0.09) = 88.29;
FCF2 = $81 million × = $96.2361 million
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
3
Copyright © 2015 Pearson Education, Inc.
