Chapter 4: Q2B (page 474)
Use the following cash flow data for Rocket Transport to find Rocket’s:
a. Net cash provided by or used in investing activities.
b. Net cash provided by or used in financing activities.
c. Net increase or decrease in cash for the year.
a. $39,000
b. $(135,000)
c. $84,000
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Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at \(63 per share. She now must value SmileWhite Corporation.
a. Calculate the required rate of return for SmileWhite using the information in the following table:
December 2010 | ||
Quick brush | Smile white | |
Beta | 1.35 | 1.15 |
Market price | \)45 | \(30 |
Intrinsic value | \)63 | ? |
b. Ludlow estimates the following EPS and dividend growth rates for SmileWhite:
First three years | 12% per year |
Years thereafter | 9% per year |
Estimate the intrinsic value of SmileWhite using the table above and the two-stage DDM. Dividends per share in 2010 were $1.72.
c. Recommend QuickBrush or SmileWhite stock for purchase by comparing each company’s intrinsic value with its current market price.
d. Describe one strength of the two-stage DDM in comparison with the constant-growth DDM. Describe one weakness inherent in all DDMs.
A company’s current ratio is 2. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio? What about the asset turnover ratio?
Adams’s research report (see the previous problem) continued as follows: “With a business expansion already under way, the expected profit surge should lead to a much higher price for Universal Auto stock. We strongly recommend purchase.”
a. Discuss the business-cycle approach to investment timing. (Your answer should describe actions to be taken on both stocks and bonds at different points over a typical business cycle.)
b. Assuming Adams’s assertion is correct (that a business expansion is already under way), evaluate the timeliness of his recommendation to purchase Universal Auto, a cyclical stock, based on the business-cycle approach to investment timing.
Universal Auto is a large multinational corporation headquartered in the United States.
For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.
The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.
Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.
An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”
Which one of the following firms would be described as having below-average sensitivity to the state of the economy?
a. An asset play firm
b. A cyclical firm
c. A defensive firm
d. A stalwart firm
Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of .30. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock.
a. At what price and P/E ratio would you expect the firm to sell?
b. What is the present value of growth opportunities?
c. What would be the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 20% of its earnings?
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