Chapter 3 Practice Questions
1. Harmonic Motors Corp. has 300 million shares outstanding. Those shares are currently trading at $7.50/share. Harmonic has total debt of $680 million, and cash and cash equivalents of $80 million. What is Harmonic’s enterprise value?
A. $2.25 billion
B. $2.85 billion
C. $2.93 billion
D. $3.01 billion
2. Which of the following describe reasons an analyst might prefer to use the price–to–cash flow ratio rather than other valuation ratios to determine whether a stock is over- or undervalued?
I. Cash flow is harder to manipulate than earnings.
II. It more fully takes into account a company’s efficiency in generating revenue.
III. It eliminates distortions caused by the accounting treatment of non-cash charges.
IV. It focuses on tangible book value rather than stated book value.
A. II and III
B. II and IV
C. I and III
D. I and IV
3. The stock of Snowpocalypse Snowboards Inc. is currently trading for $12.50 per share. The company just paid a quarterly dividend of $0.08 per share. In the three previous quarters, Snowpocalypse paid dividends of $0.06, $0.05, and $0.09 per share. What is the dividend yield of Snowpocalypse stock?
A. 0.6%
B. 4.5%
C. 1.3%
D. 2.2%
4. BlecchCo’s capital structure is 65% debt, 35% equity. The after-tax cost of BlecchCo’s debt is 4.5%. BlecchCo’s cost of equity is 8.5%. What is BlecchCo’s weighted average cost of capital?
A. 6.5%
B. 7.1%
C. 5.45%
D. 5.9%
5. A stock with a negative beta is a stock that necessarily:
A. Is more volatile than the market as a whole
B. Is less volatile than the market as a whole
C. Moves in the opposite direction from the market as a whole
D. Is expected to move in tandem with the market as a whole
6. What is a non-controlling interest?
A. Equity in a subsidiary owned by a party other than the parent company
B. Equity in the form of preferred shares