Financial Management - Chapter 7 test bank with 100%
correct answers
The preemptive right is important to shareholders because it
a. will result in higher dividends per share.
b. is included in every corporate charter.
c. protects the current shareholders against a dilution of their ownership interests.
d. protects bondholders, and thus enables the firm to issue debt with a relatively low interest
rate.
e. allows managers to buy additional shares below the current market price.
c. protects the current shareholders against a dilution of their ownership interests.
Companies can issue different classes of common stock. Which of the following statements
concerning stock classes is CORRECT?
a. All common stocks, regardless of class, must have the same voting rights.
b. All firms have several classes of common stock.
c. All common stock, regardless of class, must pay the same dividend.
d. Some class or classes of common stock are entitled to more votes per share than other
classes.
e. All common stocks fall into one of three classes: A, B, and C.
d. Some class or classes of common stock are entitled to more votes per share than other
classes.
. Which of the following statements is CORRECT?
a. Two firms with the same expected free cash flows and growth rates must also have the
same value of operations.
b. It is appropriate to use the constant growth model to estimate a stock's value even if its
growth rate is never expected to become constant.
c. If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows
are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is
also 5%.
d. The value of operations is the present value of all expected future free cash flows,
discounted at the free cash flow growth rate.
e. The constant growth model takes into consideration the capital gains investors expect to
earn on a stock.
,e. The constant growth model takes into consideration the capital gains investors expect to earn
on a stock.
If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of
the following statements is CORRECT? The stock is in equilibrium.
a. The company's stock's dividend yield is 5%.
b. The value of operations is expected to decline in the future.
c. The company's WACC must be equal to or less than 5%.
d. The company's value of operations one year from now is expected to be 5% above the
current price.
e. The expected return on the company's stock is 5% a year.
d. The company's value of operations one year from now is expected to be 5% above the
current price.
Which of the following statements is NOT CORRECT?
a. The free cash flow valuation model discounts free cash flows by the required return on
equity.
b. The free cash flow valuation model can be used to find the value of a division.
c. An important step in applying the free cash flow valuation model is forecasting the firm's
pro forma financial statements.
d. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to
find the horizon, or terminal, value.
e. The free cash flow valuation model can be used both for companies that pay dividends and
those that do not pay dividends.
a. The free cash flow valuation model discounts free cash flows by the required return on
equity.
Which of the following statements is CORRECT?
a. The preemptive right gives stockholders the right to approve or disapprove of a merger
between their company and some other company.
b. The preemptive right is a provision in the corporate charter that gives common
stockholders the right to purchase (on a pro rata basis) new issues of the firm's common
stock.
c. The free cash flow valuation model, Vops =FCF1/(WACC − g), cannot be used for firms that
have negative growth rates.
d. The free cash flow valuation model, Vops = FCF1/(WACC − g), can be used only for firms
whose growth rates exceed their WACC.
e. If a company has two classes of common stock, Class A and Class B, the stocks may pay
, different dividends, but under all state charters the two classes must have the same voting
rights.
b. The preemptive right is a provision in the corporate charter that gives common stockholders
the right to purchase (on a pro rata basis) new issues of the firm's common stock.
. A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of
capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of
operations?
a. $23.11 million
b. $23.70 million
c. $24.31 million
d. $24.93 million
e. $25.57 million
e. $25.57 million
. Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for
this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in
short-term investments and $3 million in debt, and 1 million shares outstanding, what is the
intrinsic stock price?
a. $17.28
b. $17.70
c. $18.13
d. $18.57
d. $18.57
. Young & Liu Inc.'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
c. $1,050
The projected cash flow for the next year for Minesuah Inc. 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?
correct answers
The preemptive right is important to shareholders because it
a. will result in higher dividends per share.
b. is included in every corporate charter.
c. protects the current shareholders against a dilution of their ownership interests.
d. protects bondholders, and thus enables the firm to issue debt with a relatively low interest
rate.
e. allows managers to buy additional shares below the current market price.
c. protects the current shareholders against a dilution of their ownership interests.
Companies can issue different classes of common stock. Which of the following statements
concerning stock classes is CORRECT?
a. All common stocks, regardless of class, must have the same voting rights.
b. All firms have several classes of common stock.
c. All common stock, regardless of class, must pay the same dividend.
d. Some class or classes of common stock are entitled to more votes per share than other
classes.
e. All common stocks fall into one of three classes: A, B, and C.
d. Some class or classes of common stock are entitled to more votes per share than other
classes.
. Which of the following statements is CORRECT?
a. Two firms with the same expected free cash flows and growth rates must also have the
same value of operations.
b. It is appropriate to use the constant growth model to estimate a stock's value even if its
growth rate is never expected to become constant.
c. If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows
are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is
also 5%.
d. The value of operations is the present value of all expected future free cash flows,
discounted at the free cash flow growth rate.
e. The constant growth model takes into consideration the capital gains investors expect to
earn on a stock.
,e. The constant growth model takes into consideration the capital gains investors expect to earn
on a stock.
If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of
the following statements is CORRECT? The stock is in equilibrium.
a. The company's stock's dividend yield is 5%.
b. The value of operations is expected to decline in the future.
c. The company's WACC must be equal to or less than 5%.
d. The company's value of operations one year from now is expected to be 5% above the
current price.
e. The expected return on the company's stock is 5% a year.
d. The company's value of operations one year from now is expected to be 5% above the
current price.
Which of the following statements is NOT CORRECT?
a. The free cash flow valuation model discounts free cash flows by the required return on
equity.
b. The free cash flow valuation model can be used to find the value of a division.
c. An important step in applying the free cash flow valuation model is forecasting the firm's
pro forma financial statements.
d. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to
find the horizon, or terminal, value.
e. The free cash flow valuation model can be used both for companies that pay dividends and
those that do not pay dividends.
a. The free cash flow valuation model discounts free cash flows by the required return on
equity.
Which of the following statements is CORRECT?
a. The preemptive right gives stockholders the right to approve or disapprove of a merger
between their company and some other company.
b. The preemptive right is a provision in the corporate charter that gives common
stockholders the right to purchase (on a pro rata basis) new issues of the firm's common
stock.
c. The free cash flow valuation model, Vops =FCF1/(WACC − g), cannot be used for firms that
have negative growth rates.
d. The free cash flow valuation model, Vops = FCF1/(WACC − g), can be used only for firms
whose growth rates exceed their WACC.
e. If a company has two classes of common stock, Class A and Class B, the stocks may pay
, different dividends, but under all state charters the two classes must have the same voting
rights.
b. The preemptive right is a provision in the corporate charter that gives common stockholders
the right to purchase (on a pro rata basis) new issues of the firm's common stock.
. A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of
capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of
operations?
a. $23.11 million
b. $23.70 million
c. $24.31 million
d. $24.93 million
e. $25.57 million
e. $25.57 million
. Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for
this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in
short-term investments and $3 million in debt, and 1 million shares outstanding, what is the
intrinsic stock price?
a. $17.28
b. $17.70
c. $18.13
d. $18.57
d. $18.57
. Young & Liu Inc.'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
c. $1,050
The projected cash flow for the next year for Minesuah Inc. 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?
