PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 4, Problem 34PS
Valuing a business Construct a new version of Table 4.8, assuming that the concatenator division grows at 20%, 12%, and 6%, instead of 12%, 9%, and 6%. You will get negative early free cash flows.
- a) Recalculate the PV of
free cash flow . What does your revised PV say about the division's PVGO? - b) Suppose the division is the public corporation Concatenator Corp, with no other resources. Thus it will have to issue stock to cover the negative free cash flows. Does the need to issue shares change your valuation? Explain. (Hint: Suppose first that Concatenator’s existing stockholders buy all of the newly issued shares. What is the value of the company to these stockholders? Now suppose instead that all the shares are issued to new stockholders, so that existing stockholders don’t have to contribute any cash. Does the value of the company to the existing stockholders change, assuming that the new shares are sold at a fair price?)
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Students have asked these similar questions
Considering each action independently and holding other things constant, which of the following actions would reduce a firm’s need for additional capital?
a. An increase in the dividend payout ratio.
b. A decrease in the days sales outstanding.
c. An increase in expected sales growth.
d. A decrease in the profit margin.
When the company is working at full capacity, the assets in the AFN equation is the fixed assets only
True
False
You've collected the following information about Groot, Inc.:
Profit margin
Total asset turnover
Total debt ratio
Payout ratio
= 4.44%
= 3.50
= .25
=
29%
a. What is the sustainable growth rate for the company? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
b. What is the ROA? (Do not round intermediate calculations and enter your answer as
a percent rounded to 2 decimal places, e.g., 32.16.)
a. Sustainable growth rate
b. ROA
%
15.54 %
NEED ASAP. THANK YOU!!
1. Which of the following statements is correct?
Group of answer choices
- Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
- If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.
- Dividend policy does not affect the requirement for external funds based on the AFN equation.
- AFN is not always positive.
- If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.2.
When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant.
Group of answer choices
- True…
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...
Ch. 4 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Answer this questions fast plzarrow_forwardCalculate the FCF for a firm if it has operating cash flows of 500, CAPEX of 320, and a change in NWC of -18. Assume a tax rate of 40%. Hint: Even if an input value is negative, you still apply the formula with the minus signs. FCF = operating CF - CAPEX - change in NWC Also a reminder, FCF = CF from assetsarrow_forwardCalculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?arrow_forward
- Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?arrow_forwardHow would an increase in each of the following factors affect the AFN?1. Payout ratio2. Capital intensity ratio, A0*/S03. Profit margin4. Days sales outstanding, DSO5. Sales growth rateIs it possible for the AFN to be negative? If so, what would this indicate?If excess capacity exists, how would that affect the calculated AFN?arrow_forwardWhen the company is working at full capacity, the assets in the AFN equation is the total assets True False Considering each action independently and holding other things constant, which of the following actions would reduce a firm’s need for additional capital? a. An increase in the dividend payout ratio. b. A decrease in the days sales outstanding. c. An increase in expected sales growth. d. A decrease in the profit margin.arrow_forward
- Solve this questionarrow_forwardSuppose a company ABC is forecasting an increase in sales. By using AFN model of forecasting which of the following statement would decrease the additional fund requirement of the company? the company has low profit margin The company is operating at full capacity the company has low dividend payout ratio ☐ The increase in sales growth percentage will be higharrow_forwardYou've collected the following information about Hendrix Guitars, Incorporated: Profit margin Total asset turnover Total debt ratio Payout ratio 1 T Sustainable growth rate - I 4.41% 3.20 .28 26% What is the sustainable growth rate for the company? Note: Do not round intermediate calculations and enter your answer as a percent roundec Answer is complete but not entirely correct. 11.75 %arrow_forward
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