Tangshan China’s stock is currently selling for $160.00 per share and the firm’s dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 5 percent, and Tangshan has a beta of 1.2, Tangshan’s stock would be _________.

Nico Corporation expects to generate free-cash flows of $200,000 per year for the next
five years. Beyond that time, free cash flows are expected to grow at a constant rate of
5 percent per year forever. If the firm’s average cost of capital is 15 percent, the market
value of the firm’s stock is $500,000, and Nico has a half million shares of stock
outstanding, what is the value of Nico’s stock?
(a) $12.15
(b) $121.50
(c) $11.64
(d) $116.40
Answer: A
Level of Difficulty: 4
Learning Goal: 5
Topic: Free Cash Flow Valuation Model (Equation 7.7 and Equation 7.8)
94. At year end, Tangshan China Company balance sheet showed total assets of $60
million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares
of common stock outstanding. Based on this information, Tangshan’s book value per
share of common stock is _________.
(a) $105.00
(b) $10.50
(c) $15.00
(d) $150.00
Answer: C
Level of Difficulty: 2
Learning Goal: 5
Topic: Book Value of Common Stock
95. At year end, Tangshan China Company balance sheet showed total assets of $60
million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares
of common stock outstanding. If Tangshan could sell its assets for $52.5 million,
Tangshan’s liquidation value per share of common stock is _________.
(a) $15.00
(b) $7.50
(c) $52.50
(d) $75.00
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Liquidation Value of Common Stock
96. At year end, Tangshan China Company balance sheet showed total assets of $60
million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares
of common stock outstanding. Next year, Tangshan is projecting that it will have net
income of $1.5 million. If the average PE multiple in Tangshan’s industry is 15, what
should be the price of Tangshan’s stock?
(a) $15.00
(b) $22.50
(c) $52.50
(d) $75.00
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: PE Multiple Valuation Approach
97. Tangshan China’s stock is currently selling for $160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s
most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the
expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan’s stock
would be _________.
(a) overvalued
(b) undervalued
(c) properly valued
(d) not enough information to tell
Answer: A
Level of Difficulty: 4
Learning Goal: 6
Topic: Constant Growth Valuation Model (Equation 7.4 and Equation 7.5)
98. Tangshan China’s stock is currently selling for $160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s
most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the
expected market premium is 5 percent, and Tangshan has a beta of 1.2, Tangshan’s
stock would be _________.
(a) overvalued
(b) undervalued
(c) properly valued
(d) Not enough information to tell
Answer: A
Level of Difficulty: 4
Learning Goal: 6
Topic: Constant Growth Valuation Model (Equation 7.4 and Equation 7.5)