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Q: Take home quiz ( Answered,   1 Comment )
Subject: Take home quiz
Category: Business and Money > Finance
Asked by: husenior-ga
List Price: $2.00
Posted: 19 Nov 2006 08:28 PST
Expires: 19 Dec 2006 08:28 PST
Question ID: 783999
1. Suppose a company?s most recent free cash flow (i.e., yesterday?s
free cash flow) was $100 million and is expected to grow at a constant
rate of 5 percent. If the company?s weighted average cost of capital
is 15 percent, what is the current value of operations?


A. $   913 million

B. $1,000 million

C. $1,050 million

D. $1,500 million

E. $2,000 million
Subject: Re: Take home quiz
Answered By: omnivorous-ga on 19 Nov 2006 11:47 PST
HUsenior --

This is an application of the ?constant growth model? in finance,
sometimes called the ?dividend valuation model? because returns can be
figured on dividends (or cash flows to shareholders) or on core cash
flows (how an analyst looks at stock valuations).

Pi = CFi / (Ks - g)

Pi = price in period i
CFi = cash flow in period i
Ks = required rate of return (in decimals)
g = dividend growth rate (in decimals)
i = period, usually expressed in years 

P(today) = CF (today) / (0.15 ? 0.05) = $100M / (0.10) = $1,000
million ? or b (for $1 billion)

Google search strategy:
?constant growth model? dividends
?constant growth model? cash flow

Best regards,

Subject: Re: Take home quiz
From: probonopublico-ga on 19 Nov 2006 10:00 PST
That will depend on:

1: How much Capital is employed; and

2: The Sector in which the company operates.

Please tell the Quizmaster to get real.

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