Sample Questions For Mini Test Template Page 2
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1
2
3Name: ________________________
ID: A
Rangan Company
An analyst has put together the following spreadsheet to estimate the intrinsic value of the stock of Rangan
Company (in millions of dollars):
t = 1
t = 2
t = 3
Sales
$3,000
$3,600
$4,500
NOPAT
500
600
750
Net investment in operating capital*
300
400
500
*Net investment in operating capital = Capital expenditures + Changes in net operating capital - Depreciation.
After Year 3 (t = 3), assume that the company's free cash flow will grow at a constant rate of 7 percent a
year and the company's WACC equals 11 percent. The market value of the company's debt and preferred
stock is $700 million. The company has 100 million outstanding shares of common stock.
____
4. Refer to Rangan Company. What is the company's free cash flow the first year (t = 1)?
a.
$100 million
b.
$200 million
c.
$300 million
d.
$400 million
e.
$500 million
____
5. For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after
taxes.)
a.
k
> k
> k
> WACC.
d
e
s
b.
k
> k
> k
> WACC.
s
e
d
c.
WACC > k
> k
> k
.
e
s
d
d.
k
> k
> WACC > k
.
e
s
d
e.
None of the statements above is correct.
Jackson Company
The Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this
dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10
percent; and the expected return on the market is 14 percent. The firm's investment bankers believe that new
issues of common stock would have a flotation cost equal to 5 percent of the current market price.
____
6. Refer to Jackson Company. How much should an investor be willing to pay for this stock today?
a.
$62.81
b.
$70.00
c.
$43.75
d.
$55.00
e.
$30.00
2
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