1. On a particular date, FedEx has a stock price of $88.66 and an EPS of $6.34.
ID: 2706859 • Letter: 1
Question
1. On a particular date, FedEx has a stock price of $88.66 and an EPS of $6.34. Its competitor, UPS, had an EPS of $0.40. What would be the expected price of UPS stock on this date, if estimated using the method of comparables?
options: A) $5.59 B) $8.39 C) $10.49 D) $13.98
2. Suppose that a stock gave a realized return of 20% per year over a two-year time period and a 10% return over the third year. The geometric average annual return is:
options: A) 9.70% B) 11.20% C) 14.96% D) 16.55%
3.Conundrum Mining is expected to generate $12 million, $18 million, $22 million and $26 million in free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected current share price?
options: A)$10.84 B)$13.72 C)$16.16 D)$16.2
Explanation / Answer
1. Price = 88.66/6.34*0.4 = 5.59. So the answer is choice (A)
2. Annual return = [(1+20%)*(1+20%)*(1+10%)]^(1/3)-1 = 16.55%. So the answer is choice (D)
3. Firm value in 4 years = 26*1.05/(12%-5%) = 390
So firm value now = 12/1.12 + 18/1.12^2 + 22/1.12^3 + 26/1.12^4 + 390/1.12^4 = 305
Equity value = 305+80-60 = 325 million
Share price = 325/30 = 10.84
So the answer is choice (A)
Hope this helped ! Let me know in case of any queries.
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