SM ForFinancial Management Theory and Practice 15th Edition By Eugene Brigham – Test Bank

Complete Test Bank With Answers

Sample Questions Posted Below

Solution

Chapter: 7 Valuation of Stocks and Corporations

Problem: 22

Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

INPUTS (In millions) Year

Current Projected

0 1 2 3

Free cash flow Marketable Securities Notes payable Long-term bonds Preferred stock WACC Number of shares of stock -$20.0 $20.0 $80.0

$40

$100

$300

$50

9.00%

40

a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period

immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.

Projected

Current 0 1 2 3

Free cash flow Long-term constant growth in FCF

Horizon value

-$20.0 $20.0 $80.0

$1,562.08

$119.77

$1,681.84

b. Calculate the present value of the horizon value, the present value of the free cash flows, and the

estimated Year-0 value of operations.

PV of horizon value PV of FCF Value of operations (PV of FCF + HV) c. Calculate the estimated Year-0 price per share of common equity.

Value of operations Plus value of narketable securities Total value of company Less value of debt Less value of preferred stock Estimated value of common equity Divided by number of shares Price per share $1,681.84

$40.00

$1,721.84

$400.00

$50.00

$1,271.84

$40.00

$31.807/16/2015

e following questions.

cted

4

$84.0

e forecast period

r Year 3.

cted

4

$84.0

5.0%

$2,205.00

h flows, and the