Chapter 3 Practice Question Answers
1. Answer: B. A company’s enterprise value is frequently referred to as its “takeover value.” Enterprise value is the sum of a company’s net debt plus the market value of its equity. Equity market value is the same calculation as market cap: shares outstanding x market price per share. The market value of Harmonic’s equity is $2.25 billion (300 million x $7.50). Its net debt is its total debt ($680 million) less cash and cash equivalents ($80 million), or $600 million. Harmonic’s enterprise value is $2.25 billion plus $600 million, or $2.85 billion.
2. Answer: C. The price/cash flow ratio measures the market’s expectations of future cash flows rather than earnings growth, as the price/earnings ratio does. Some analysts prefer to use P/CF to determine if a stock is appropriately valued. The reasons such analysts give include options I and III. The P/CF ratio has nothing to do with book value, so option IV is incorrect. It also does not directly account for efficiencies in generating revenue, so option II is incorrect.
3. Answer: D. Dividend yield, usually expressed as a percentage, measures the return to shareholders in terms of dividends paid relative to share price. It is calculated by dividing the annual dividend per share by the current market price per share. In the past year, Snowpocalypse has paid out $0.28 per share in dividends (0.08 + 0.06 + 0.05 + 0.09). Dividing this amount by the current share price ($12.50) shows the dividend yield to be 0.0224, or 2.2%.
4. Answer: D. The weighted average cost of capital (WACC) = (after-tax cost of debt x % of debt) + (cost of equity x % of equity). Plugging in the figures provided, the relevant equation is (65 x 0.045) + (35 x 0.085). BlecchCo’s WACC is 2.925 + 2.975, or 5.9%.
5. Answer: C. A stock’s beta is the measure of its overall volatility relative to the market as a whole. A