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1. A key input into your terminal value is the expected growth rate in perpetuity. Assuming that you
are valuing a company in a currency with a risk free rate of 3 . Which of the following growth rates
is not feasible?
a. - 3 in perpetuity b. 0 in perpetuity
c. 2 in perpetuity d. 4 in perpetuity
2. Avalon Inc. is a high growth publicly traded firm that is expected to become a stable growth firm
after 5 years. You have estimated an expected after tax operating income of 60 million in year 6 and
believe that the firm will generate a return on capital of 12 in perpetuity. If the cost of capital is 10 and
the expected growth rate in perpetuity after year 5 is 3, what will the terminal value be at the end of
year 5?
a. 857.14 million b. 666.67 million c. 642.86 million d. 450 million
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3. Wayfarers Inc. is a risky technology company that is expected to have a cost of capital of 12 for
the next 10 years. At the end of year 10, it is anticipated that the firm will become a mature
company, earning a return on invested capital equal to its stable period cost of capital of 10 in
perpetuity. If the expected after tax operating income in year 11 is 80 million and the expected
growth rate in perpetuity is 3, estimate the present value of the terminal value at the end of year 10.
a. 257.58 million b. 308.43million c. 367.97 million d. 440.62 million
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4. The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost
of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8%
coupon. The tax rate is 34%. What is the value of the firm?
A. $48,600 B. $50,000 C. $52,680 D. $56,667
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5. When you use relative valuation, you are trying to price assets based upon what similar assets are
being priced at. In comparing across these assets, which of the following do you have to do?
a. Find similar or comparable assets, with trading prices
b. Standardize the prices to a common variable available for all assets
c. Control the standardized prices for differences across the assets
d. All of the above
6. Which of the following would you consider the best indicator of an undervalued firm?
A. A firm with a P/E ratio lower than the market average.
B. A firm with a P/E ratio lower than the average P/E ratio for the firm's peer group.
C. A firm with a lower P/E ratio than its peer group, and a lower expected growth rate.
D. A firm with a lower P/E ratio than its peer group a higher expected growth rate, and higher risk.
E. A firm with a lower P/E ratio than its peer group, a lower expected growth rate, and lower risk.
F. A firm with a lower P/E ratio than its peer group, a higher expected growth rate, and lower risk.
7. Allwyn Inc is a stable growth, dividend paying firm that is expected to pay out 60% of its
expected earnings per share of $1.50 next year as dividends. If the earnings are expected to grow 3% a
year in perpetuity and the cost of equity is 9%, what PE ratio would you expect the firm to have?
a. 6.00 b. 9.00 c. 10.00 d. 20.00
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8. If you are looking for a cheap stock on a PE ratio basis, which of the following combinations
is the best one for you?
a. Low PE, high growth, high risk, high payout
b. Low PE, high growth, low risk, high payout
c. Low PE, high growth, low risk, low payout
d. Low PE, high growth, high risk, low payout
9. You are trying to value Zimco Telecom Inc., a money losing company that reported EBITDA of
R$80 million in the most recent year on revenues of $ 1billion. You expect revenues to grow 6 a
year for the next 5 years and the EBITDA/Revenue margin to improve to 8 by year 5. If healthy
telecom companies trade at a multiple of 6 times EBITDA and you choose to apply this multiple to
the fifth year’s expected EBITDA, estimate the value of equity per share today. (You have a cost of
capital of 12 for the next 5 years, a cash balance of $ 50 million, debt outstanding of $200 million and
12 million shares outstanding today.)
a. $0.00 b. $10.19 c. $17.87 d. $41.03
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10. The increase in risk to equityholders when financial leverage is introduced is evidenced by:
A. higher EPS as EBIT increases.
B. a higher variability of EPS with debt than all equity.
C. increased use of homemade leverage.
D. equivalence value between levered and unlevered firms in the presence of taxes.
11. Other things being equal, a low ________ would be most consistent with a relatively high growth
rate of firm earnings and dividends.
A. dividend payout ratio B. degree of financial leverage
C. variability of earnings D. inflation rate
12. National City Corporation, a bank holding company, reported earnings per share of $2.40 in 1993,
and paid dividends per share of $1.06. The earnings had grown 7.5% a year over the prior five years,
and were expected to grow 6% a year in the long term (starting in 1994). The stock had a beta of 1.05
and traded for ten times earnings. The treasury bond rate was 7%. Estimate the P/E Ratio for National
City Corporation.
a/ 6.91 b/ 7.51 c/ 9.45 d/ None of the others
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13. International Flavors and Fragrances, a leading creator and manufacturer of flavors and
fragrances, paid out dividends of $0.91 per share on earnings per share of $1.64 in 1992. The firm is
expected to have a return on equity of 20% between 1993 and 1997, after which the firm is expected
to have stable growth of 6% a year (the return on equity is expected to drop to 15% in the stable
growth phase.) The dividend payout ratio is expected to remain at the current level from 1993 to 1997.
The stock has a beta of 1.10, which is not expected to change. The treasury bond rate is 7%. Estimate
the P/E ratio for International Flavors, based upon fundamentals.
A/ 9.97 B/ 7.5 C/ 4.24 D/ None of the others
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 14. Grumman Corporation, a producer of military aircraft, reported net income of $120 million in
1993, after paying interest expenses of $19 million. The depreciation allowance in 1993 was $77
million, while capital expenditures amounted to $80 million in the same year. Working capital
increased by $15 million in 1993. (The tax rate is 40%.) Grumman finances 10% of its net capital
investment and working capital needs using debt. The free cash flows to equity are expected to grow
10% a year from 1994 to 1998, and 6% a year after that. The stock had a beta of 0.80, and this is
expected to remain unchanged. The treasury bond rate is 7%. Estimate the Price/FCFE ratio for the
firm.
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15. Grumman has $251 million in debt outstanding at the end of 1993. What is the Value/FCFF ratio?
the Value/EBITDA ratio? Why are they different from the Price/FCFE ratio?
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16. You are a venture capitalist, who is interested in investing in Lam Media, a social media
company. You expect revenues to be $600 million in 3 years and believe that you can sell the
company for three times revenues at the end of year 3. The cost of capital for the company is 15,it
has no cash or debt and there is a 20 chance that the firm will not make it (in which case you will
get nothing for the assets). Ignoring cash flows in the next 3 years, what is your estimate of the
value of equity in the company today (in millions)?
a. $ 236.7 b. $ 946.8 c. $1183.5 d. $1440.0 e. $1800.0
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17. Oneida Inc. is a publicly traded company with a 60% cross holding in Cyclops Inc., also a publicly
traded company. You are given the following information from Oneida Inc’s consolidated financials and
Cyclop’s financials:
Oneida Cyclops
Market Cap 5000 2000
Debt 1000 400
Cash 800 100
EBITDA 900 500
Minority interest 400 0
(The market cap number is the share price times number of shares. All of the other numbers come
from financial statements). What is the EV/EBITDA multiple for Oneida on a consolidated basis?
a. 5.78 b. 6.22 c. 6.67 d. 8.00
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18. You are using a dividend discount model to value a bank, which is expected to generate a 15
return on equity in perpetuity. The company paid dividends of 40 million on net income of 100
million in the most recent year and is expected to maintain high growth for the next 3 years, before
settling into stable growth, growing 3% a year in perpetuity. If the cost of equity is 9%, estimate the
terminal value at the end of year 3.
a. 889.25 million b. 1778.51 million c. 2223.13 million d. 741.04 million
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19. Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30%
tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and
have a $24,000 increase in net working capital this year. What is Stingy's FCFF?
A. 1,139,000 B. 1,200,000 C. 1,025,000 D. 921,000 E. 873,000
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20. Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to
grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the
market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the
stock is _____.
A. $46.67 B. $50.00 C. $56.00 D. $62.50 E. None of these is correct
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9/

Rev year 0 = 1000. Growth 6% → year 5 rev = 1000 × 1.06^5 ≈ 1338.

Margin = 8% → EBITDA = 107 => Value at year 5 = 6 × 107 = 642.

PV = 642 / (1.12^5) ≈ 364.

Equity= 364 + 50 - 200= 214.

Per share = 214 / 12 ≈ 17.87.

=> C