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Exam 22: Corporate Valuation and Governance

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Question 21

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Which of the following best describes the condition under which an agency relationship arises?

A) when a principal contracts employees to work overtime.
B) when a principal negotiates a new wage contract with a union.
C) when a principal delegates decision-making authority to another party on behalf of the firm
D) when shareholders vote to decline a dividend payment.

E) All of the above
F) C) and D)

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Question 22

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Suppose Yon Sun Corporation'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) A) and D)
F) A) and B)

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Question 23

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A poison pill is also known as a corporate restructuring.

Suppose Toronto Corp.'s free cash flow in the previous year was $250,000,and FCF is expected to grow at a constant rate of 5%.If the company's weighted average cost of capital is 15%,what is the value of its operations?

Leak Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2,what is the Year 0 value of operations,in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments) . $\begin{array}{lll}\text { Year: } & 1 & 2 \\\text { Free cash flow: } & -\$ 50 & \$ 100\end{array}$

Based on the corporate valuation model,the value of a company's operations is $1,200 million.The company's balance sheet shows $80 million in accounts receivable,$60 million in inventory,and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable,$120 million in notes payable,$300 million in long-term debt,$50 million in preferred stock,$180 million in retained earnings,and $800 million in total common equity.If the company has 30 million shares of stock outstanding,what is the best estimate of the stock's price per share?

Zhdanov Inc.forecasts that its free cash flow in the coming year,i.e.,at t = 1,will be -$10 million,but its FCF at t = 2 will be $20 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14%,what is the firm's value of operations,in millions?