Question Details

Campbell Co. is trying to estimate its weighted average cost of capital (WACC).  Which of the following statements is most correct 



1.       You must estimate the intrinsic value of Gallovits Technologies’ stock.  Gallovits- end-of-year free cash flow (FCF) is expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter.  The company- WACC is 11%.  Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock outstanding.  What is Gallovits' estimated intrinsic value per share of common stock?

a.	$22.67
b.	$24.00
c.	$25.33
d.	$26.67  
2. Which of the following statements is CORRECT?

a.	The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
b.	If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock- dividend yield is also 5%.
c.	The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.  
d.	The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

3. Which of the following statements is CORRECT, assuming stocks are in equilibrium?

a.	The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 
b.	Assume that the required return on a given stock is 13%. If the stock- dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
c.	A stock- dividend yield can never exceed its expected growth rate.
d.	A required condition for one to use the constant growth model is that the stock- expected growth rate exceeds its required rate of return. 

4. The required returns of Stocks X and Y are rX = 10% andrY = 12%.  Which of the following statements is CORRECT?

a.	If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.  
b.	If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
c.	If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
d.	The stocks must sell for the same price.
5.Campbell Co. is trying to estimate its weighted average cost of capital (WACC).  Which of the following statements is most correct ?
 
a.	The after-tax cost of debt is generally cheaper than the after-tax cost of equity.   
b.	Since retained earnings are readily available, the cost of retained earnings is generally lower than the cost of debt.
c.	The after-tax cost of debt is generally more expensive than the before-tax cost of debt. 
d.	Statements a and c are correct. 




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