Fundamentals of Corporate Finance 3rd Edition Berk Test Bank
Fundamentals of Corporate Finance 3rd Edition Berk Test Bank
Fundamentals of Corporate Finance 3rd Edition Berk Test Bank
1) The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt
directly, if free cash flow is calculated based on EBIT.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four years, after
which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12%
and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is
Conundrum's expected terminal enterprise value?
A) $413.4 million
B) $459.3 million
C) $505.3 million
D) $528.2 million
Answer: B
Explanation: B) million
Diff: 2 Var: 15
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
1
Copyright © 2015 Pearson Education, Inc.
3) Year 1 2 3 4
Free Cash Flow $12 million $18 million $22 million $26 million
Conundrum Mining is expected to generate the above free cash flows over the next four years, after
which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11%
and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is
Conundrum's expected current share price?
A) $12.61
B) $16.40
C) $20.18
D) $20.81
Answer: A
Explanation: A) FCF5 = $26 million × (1 + 0.05) = $27.3 million; V 4 = $27.3 million / (0.11 - 0.05)
= $455.00 million; using a financial calculator, V0 = $358.36 million;
P0 = (358.36 + 85 - 65) / 30 = $12.61
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Year 1 2 3 4 5
Free Cash Flow $22 million $26 million $29 million $30 million $32 million
General Industries is expected to generate the above free cash flows over the next five years, after which
free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9%
and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding,
what is General Industries' expected current share price?
A) $7.78
B) $8.17
C) $9.34
D) $11.67
Answer: A
Explanation: A) FCF6 = $32 million × (1 + 0.05) = $33.6 million; V 5 = $33.6 million / (0.09 - 0.05)
= $840 million; using a financial calculator, V0 = 652.45;
P0 = $(652.45 + 15 - 45) million / 80 million = $7.78
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
Copyright © 2015 Pearson Education, Inc.
5) Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the
company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash
flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average
cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100
million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2?
A) $1384.24
B) $1245.82
C) $1107.39
D) $968.97
Answer: A
Explanation: A) FCF1 = $88 million × (1 + 0.1) = $96.8 million;
FCF2 = $88 million × = $106.48 million;
V2 = ($106.48 million × 1.04) / (0.12 - 0.04) = $1384.24 million
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6) Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the
company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow
is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost
of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million
shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?
A) $1429.79 million
B) $86.61 million
C) $1572.77 million
D) $96.24 million
Answer: D
Explanation: D) FCF1 = 81 × (1 + 0.09) = 88.29;
FCF2 = $81 million × = $96.2361 million
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
3
Copyright © 2015 Pearson Education, Inc.
7) Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the
company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash
flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average
cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100
million shares outstanding, what is Gonzales Corporation's expected current share price?
A) $14.37
B) $11.87
C) $12.49
D) $16.24
Answer: C
Explanation: C) FCF1 = $86 million × (1 + 0.1) = $94.6 million;
FCF2 = $86 million × = $104.06 million;
FCF3 = 104.06 million × (1 + 0.04) = $108.2224 million
V2 = $108.2224 million / (0.11 - 0.04) = $1546.03 million
using a financial calculator, V0 = $1424.48 million
P0 = (1424.48 million - 275 million + 100 million) / 100 million = $12.49
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
4
Copyright © 2015 Pearson Education, Inc.
8) Use the table for the question(s) below.
Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry
growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If
Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt,
and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the
start of year 1?
A) $6.52
B) $11.74
C) $13.04
D) $23.48
Answer: C
Explanation: C) FCF5 = $18.65 million × (1 + 0.05) = $19.5825 million;
V4 = $19.5825 million / (0.11 - 0.05) = $326.38 million;
using a financial calculator, V0 = $264.7655 million;
P0 = ($264.7655 million + 50 - 80) / 18 million = $13.04
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5
Copyright © 2015 Pearson Education, Inc.
9) Use the table for the question(s) below.
Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry
growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries.
Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt,
and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT
becomes 12% of sales, by how much will its stock price increase?
A) $3.27
B) $3.92
C) $5.72
D) $9.80
Answer: A
Explanation: A) Calculate FCF1 = $16.812 million, FCF2 = $19.524 million,
10) Which of the following is the appropriate way to calculate the price of a share of a given company
using the free cash flow valuation model?
A) P0 = Div1/(rE - g)
B) P0 = PV(Future Free Cash Flow of Firm) / (Shares Outstanding0)
C) P0 = [Div1 / (rE - g)] / (Shares Outstanding0)
D) P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)
Answer: D
Diff: 1 Var: 1
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6
Copyright © 2015 Pearson Education, Inc.
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