Explore BrainMass
Share

# Stock valuation

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

1) Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be \$60 million in year 5, and the FCF growth rate is expected to constant 6.5% beyond that point. The weighted average cost of capital is 12%. What is the horizon (or terminal) value (in millions) at t=5?

2) Which of the following is correct?

a) the corporate valuation model requires the assumption of a constant growth rate in all years.
b) to implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
c)To implement the corporation valuation model, we discount projected free cash flows at the WACC
d) to implement the corporate valuation model, we discount NOPAT at the weighted average cost of capital

3)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) The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.

c) If a stock has a required rate of return of 12%, and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yeild is also 5%.

d) The stock valuation model, p0=d1/ (rs-g), can be used to vale firms whose dividends are expected to decline at a constant rate, that is, to grow at a negative rate.

e) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

#### Solution Preview

Stock valuation
1) Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be \$60 million in year 5, and the FCF growth rate is expected to constant 6.5% beyond that point. The weighted average cost of capital is 12%. What is the horizon (or terminal) value (in millions) at t=5?

Please show work so i can follow, excel prefer-thanks

Terminal value = Estimated free cash flow of sixth year/ (Cost of capital - Growth ...

#### Solution Summary

Solution discusses the Stock valuation

\$2.19