Question #24

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 11

Status: Correct

Correct Answer: A

Part of Context Group: Q24-25 First in Group
Shared Context
- The value of TOY, Inc.'s stock given the above assumptions, is closest to: A) $50.86. B) $64.71. C) $61.57.
Question
Comparing the current market value of TOY to our estimate of the stock's current market value, it is most likely that at the current market price of $56.00, TOY Inc. stock is:
Answer Choices:
A. overvalued
B. undervalued
C. fairly valued
Explanation
Our calculated value of the stock = FCFE1 / (r − gn) = 3.56 / (0.12 − 0.05) = $50.86. The current market price is $56.00, because the market price is greater than the estimated price, the stock is overvalued in the market.
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