Download Answers Key Quiz 3 - Financial Management | FIN 316 and more Quizzes Financial Management in PDF only on Docsity! Quiz 3 (100 Points) Finance 316: Financial Management John M.R. Chalmers Summer 2002 Associate Professor of Finance 1) (5pts) You are valuing a private firm, ABC co. It has cash flows of $50 million this year. XYZ Corp., a rival firm in the same industry as ABC has cash flows of $4.00 per share and a price of $80.00 per share. What is a reasonable estimate of the total value of ABC? 2) 3) P = % .CF*Aec c F,sc (5pts) You and your friend are talking about investing. Your friend notes that utility stocks have PIE ratios around 10 while technology stocks (such as Microsoft) have a P/E ratios around 33! He/she says, “Why would anyone buy Microsoft--it’s way overpriced relative to the utility stocks--they’re a bargain!” Is this analysis correct? Why or why not? (Spts) What is your return on a stock purchased for $20 per share, held for 1 year, with a dividend payment of $1.50, and a price 1 year later of $21.25? 4) Singal Dating service is a company you are considering for purchase in your stock portfolio. Singal paid a dividend of %7ishare yesterday, the CEO expects the dividend to remain at $5/share for the next two years, from year 2 to 3 dividends are expected to grow at a constant rate of 5% per year forever. The CEO believes that a fair required rate of return is 12%. a) (5pts) What are expected dividends for Singal for years I, 2, 3 and 4 ? J-233 p ‘5- cL)s (r.osSs s z 5.2s s.s I b) (1Opts)What is the price of a share of Singal stock today (year O)? TL; t ~ &,_*L& gr.arrbl pr&Q+.. 5) You are considering making a Howlin’ Mad Murdock action figure to capitalize on what you are sure will be a massive resurgence in A-Team fever. Production will cost $5 million. If A- Team fever strikes, you will sell action figures worth $10 million (in present value). lfthe foolish youth of today do not catch the fever, you will only sell action figures worth $2 million. Each scenario has a 50% chance of happening. Before beginning production, you can field a marketing survey to determine which scenario will happen. The survey costs $1 million. a) (I 2 pts) Show that it is worth it to field the survey. b) (3 pts) What is the source of value for the survey? -i-& 0L
