Concept Checks

12.1: No
In firm valuation, the assumptions about leverage have to be made to compute the cost of capital.

12.2: Biogen
There are more significant barriers to entry (the patent, for instance) for Biogen.

12.3: All of the above
While all of these phenomena might not occur at the same time, different firms will be exposed to one or more of the phenomena at some point in time in the growth cycle.

12.4: All of the above
Historical growth does look at the past, analyst estimates are sometimes biased and fundamental growth rates often just reflect current year inputs.

12.5: False
While the assumption that growth is constant might be violated, the present value effect of averaging uneven growth over time and using a constant rate is likely to be small.

12.6: False
The terminal value will reflect the expected dividend payout when the firm reaches stable growth.

12.7: False
The terminal value will be heavily influenced by assumptions about growth during the high growth period.

12.8: Net capital expenditures should decrease as firms approach stable growth
In stable growth, firms will have to reinvest less. If they reinvest nothing, they cannot grow.

12.9: The FCFE value will usually be higher than the DDM value
Most firms pay out less in dividends than they have available in FCFE.

12.10: Terminal value with no net capital expenditures = 1644/(.125-.06) = $25.294
Terminal value with current cap ex ratio = 1330/(.125-.06) = 20461
Expected FCFE in year 6 with no net cap ex = $ 1644
Expected FCFE in year 6 with current cap ex ratio = 1330 (Net Cap Ex = 314

12.11: Earnings per share
You get the benefit of leverage, and the potential for a decrease in the number of shares if the firm is accumulating cash that it will use to buy back stock.

12.12: No
You can allow leverage to change over time in a firm valuation.

12.13: Current total debt outstanding
To get to the value per share, you have to subtract out the other non-equity claims before dividing by the number of shares.

12.14: All of the above
A firm's PE is affected by all of these factors.

12.15: The higher of the two values, since it is my job to get the highest price I can for my client
Of course, the investors I place these IPOs with are also my customers, creating a conflict of interest.