24.
The sustainable growth rate of a firm is best described asthe
| | minimum growth rate achievable, assuming a 100 percent retentionratio. |
| | minimum growth rate achievable if the firm maintains a constantequity multiplier. |
| | maximum growth rate achievable, excluding external financing ofany kind. |
| | maximum growth rate achievable, excluding any external equityfinancing while maintaining a constant debt-equity ratio. |
| | maximum growth rate achievable with unlimited debtfinancing. |
| | None of the options are correct. |
25.
Which of the following statements are correct?
I. Going-concern value of a firm is equal to the present value ofexpected future cash flows to owners and creditors.
II. When an acquiring firm purchases a target firm’s equity, theacquirer need not assume the target’s liabilities.
III. The market value of a public company reflects the worth of thebusiness to minority investors.
IV. The fair market value of a business is usually the lower of itsliquidation value and its going-concern value.
| | I and III only |
| | II and IV only |
| | II and III only |
| | I, II, and III only |
| | II, III, and IV only |
| | None of the options are correct. |
26.
The following information is available about Chiantivino Corp.(CC):
| Stock price per share | $ | 8.00 |
| Common shares outstanding (millions) | | 10 |
| Market value of interest-bearing debt (millions) | $ | 75 |
| Weighted-average cost of capital | | 14% |
An activist investor is confident that by terminating CC’smoney-losing fortified wine division, she can increase free cashflow by $4 million annually for the next decade. In addition, sheestimates that an immediate, special dividend of $10 million can befinanced by the sale of the division.
| | Assuming these actions do not affect CC’s cost of capital, whatis the maximum price per share the investor would be justified inbidding for control of CC? What percentage premium does thisrepresent? |
| | Show your answer ifyou conduct a sensitivity analysis by assuming the cost of capitalis 15 percent and the increased cash flow is only $3.5 million peryear.
a. The maximum justifiable premium = the fair market value of CCunder new management − the fair market value of CC under existingmanagement. A plausible estimate of CC’s fair market value underexisting management is its standalone value = current market valueof firm = $8 × 10 million + 75 million = $155 million.
Fair market value under new management = $155 million + presentvalue of enhancements = $155 million + present value of a $4million annuity for 10 years at 14% + $10 million from sale of thedivision.
| Input: | 10 | 14 | ? | 4 | 0 | | n | i | PV | PMT | FV | | Output: | | | −20.86 | | |
In Excel:
=PV(0.14,10,4)
=−20.86
Fair market value = 155 million + 20.86 million + 10 million =$185.86 million.
Fair market value of equity = $185.86 −75 = $110.86 million.
Fair market of equity per share = $110.86/10 = $11.09.
This is a 38.6% premium over the existing $8 share price.
b. The fair market value of the firm assuming a 15 percent discountrate and a $3.5 million annuity = 155 + 17.57 + 10 = $182.57million.
Value of equity = 182.57 − 75 = 107.57.
Value per share = 107.57/10 = $10.76.
This is a 34.5% premium over the existing price. |
27.
Which of the following statements is/are correct?
I. Going-concern value of a firm is equal to the present value ofexpected net income.
II. When a buyer values a target firm, the appropriate discountrate is the buyer’s weighted-average cost of capital.
III. The liquidation value estimate of terminal value usuallyvastly understates a healthy company’s terminal value.
IV. The value of a firm’s equity equals the discounted cash flowvalue of the firm minus all liabilities.
| | II only |
| | III only |
| | I and II only |
| | II and III only |
| | II, III, and IV only |
| | None of the options are correct. |
28.
A recent annual income statement for Stone Creek Roofing isshown below.
| Net sales | $5,000 |
| Cost ofsales | | 3,200 |
| Grossprofit | | 1,800 |
| Operatingexpense | | 800 |
| Depreciationexpense | | 200 |
| Operatingincome | | 800 |
| Interestexpense | | 100 |
| Income beforetax | | 700 |
| Tax | | 175 |
| Income aftertax | $ | 525 |
| | |
Assume that during the year, Stone Creek spent $180 on new capitalequipment and increased current assets net of non-interest-bearingcurrent liabilities by $120. What was Stone Creek’s free cash flowin this year?
| | $425 |
| | $500 |
| | $700 |
| | $725 |
| | $740 |
| | None of the options are correct. |
