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Exam 13: Measuring and Creating Value

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Question 1

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Target firms in a merger or acquisition process realize,on average,

A) significantly positive per share price premiums.
B) significantly negative per share price reductions.
C) no significant change in price.
D) unknown returns.This is an unanswered research question.

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Question 2

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When estimating a firm's FCFF we CANNOT ignore interest expenses because there is no way to incorporate these expenses into the cost of capital calculation.

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Question 3

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The major disadvantages of the Free Cash Flow to the Firm method are that it can be more time consuming and difficult to use than other methods.

InfoTech Solutions Inc.has a historic P/E multiple of 26,a current EPS of $1.10 projected to grow by 5% in the coming year,and a forward looking P/E multiple of 22.With this information please estimate the current price of the firm's stock

Ellis Manufacturing Inc.has estimated FCFF for each of the next five years and believes that subsequent cash flows will grow at a constant annual rate of 3% indefinitely.If FCFF are $4,500,000 in year five,and the cost of capital is 9%,what is the value in year five of these terminal value cash flows?

Legacy Industries Inc.has a historic P/E multiple of 15,a current EPS of $2.50 projected to grow by 4% in the coming year,and a forward looking P/E multiple of 18.With this information please estimate the current price of the firm's stock.

An advantage of the book value of equity plus adjustments approach is:

Which of the following is NOT a positive attribute of the price-earnings multiple valuation model?

Which of the following equations for the Book value Plus Adjustment method is correct?

MegaToy Inc.is considering acquiring Action Figures Inc.,both publicly traded firms in the toy industry.Action Figures is currently trading at $18 per share and has 15 million shares outstanding.The executive team at MegaToy believes that the present value of potential synergies is $70 million if the firms combine.What is the highest bid price per share that MegaToy should consider paying for Action Figure shares? What is the largest percentage premium over the current share price MegaToy would be willing to pay?

Mason Construction Inc.had net sales of $480,000,costs of sales of $130,000,additional expenses of $200,000,depreciation of $40,000,and a tax rate of 30%.Use this information to determine the firm's after tax earnings on a cash basis.

For the FCFF calculation it is important to include the total net working capital of the firm.

________ are common forms of non-cash expenses for a firm.

Active Athletics Inc.has an EBIT of $400,000,$150,000 in depreciation,$500,000 in outstanding debt,a forward-looking EV/EBITDA multiple of 6.0,and an estimated cost of capital of 14%.Use the EV/EBITDA approach to value the firm.

The EVA measure has the benefit of being conceptually simple,applicable to business units (in addition to the firm as a whole),but is uncorrelated with stock price performance.

Which of the following decisions by management could increase a firm's Market Value Added (MVA) ?

Traditional financial statements include only interest costs associated with any debt and not the return required or expected by equity holders,which is included in the EVA approach.

EBITDA represents a simple proxy for cash flows from financing.

Complete by filling in each of the missing values (there are 18 total missing values).

EVA is a multi-period rather than a one-period measure of true economic performance