Assignment 1:
Question a:
|
Calculation of value of firm |
|
|
Cost of equity = |
10.00% |
|
Market value of equity = |
750 |
|
Market value of debt = |
500 |
|
After-tax interest rate on debt = |
5.00% |
|
Debt/Capital ratio = |
0.4 |
|
Cost of capital = |
8.00% |
|
Cash flow to firm = |
$100.00 |
|
Value of firm= |
$1,250.00 |
Question b:
|
Calculation of value of equity |
|
|
Cash flow to firm |
$100.00 |
|
– Interest (1-t) |
$25.00 |
|
= Cash flow to equity |
$75.00 |
|
Value of equity |
$750.00 |
Question c:
|
Cost of equity = |
10.00% |
|
Market value of equity = |
850 |
|
Market value of debt = |
500 |
|
After-tax interest rate on debt = |
5.00% |
|
Debt/Capital ratio = |
0.37 |
|
Cost of capital = |
8.15% |
|
Cash flow to firm = |
$100.00 |
|
Value of firm= |
$1,227.27 |
|
Calculation of value of equity |
|
|
Cash flow to firm |
$100.00 |
|
– Interest (1-t) |
$25.00 |
|
= Cash flow to equity |
$75.00 |
|
Value of equity |
$750.00 |
Question d:
In case of FCFF an FCFE valuation method, it is important for the business to not to have depreciation and amortization expenses, capital expenditure and interest expenses in order to compute and get the same amount of average cash flows of the business. These items create differentiation in the cash flow of the business and affect the valuation process of the business (Gibson, 2011).
Assignment 2:
Question a:
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FCFE valuation model |
||||
|
2015 |
2016 |
2017 |
||
|
Net income |
26592.7 |
27445.8 |
31945.7 |
|
|
Add: Depreciation & amortization |
0 |
0 |
||
|
Add: Changes in WC |
911.8 |
5249.7 |
||
|
Add: CAPEX |
11042 |
10458 |
||
|
Add: Net borrowings |
6808 |
7162 |
||
|
46207.6 |
54815.4 |
Average =50511.5 |
||
|
Present value of discrete cash flows for next 10 years |
||||
|
Year |
FCFF ($’000) |
PVF @10% |
PV of Cash Flows |
|
|
1 |
53,037.08 |
0.909 |
48,215.52 |
|
|
2 |
55,688.93 |
0.826 |
46,023.91 |
|
|
3 |
58,473.38 |
0.751 |
43,931.91 |
|
|
4 |
61,397.04 |
0.683 |
41,935.01 |
|
|
5 |
64,466.90 |
0.621 |
40,028.87 |
|
|
6 |
67,690.24 |
0.564 |
38,209.38 |
|
|
7 |
71,074.75 |
0.513 |
36,472.59 |
|
|
8 |
74,628.49 |
0.467 |
34,814.74 |
|
|
9 |
78,359.92 |
0.424 |
33,232.25 |
|
|
10 |
82,277.91 |
0.386 |
31,721.70 |
|
|
Total |
394,585.87 |
Assumptions: It has been estimated that the cost of capital of the business is 6%.
|
FCFE valuation model |
||||
|
2015 |
2016 |
2017 |
||
|
EBIT |
44321.1 |
45743 |
53242.9 |
|
|
Tax rate |
17728.4 |
18297.2 |
21297.2 |
|
|
EAT |
26592.7 |
27445.8 |
31945.7 |
|
|
ADD: Noncash charges |
0 |
0 |
||
|
Add: Changes in WWC |
911.8 |
5249.7 |
||
|
Less: Capital expenditure |
11042 |
10458 |
||
|
81355.8 |
101277.5 |
91316.65 |
||
|
Present value of discrete cash flows for next 10 years |
||||
|
Year |
FCFF ($’000) |
PVF @10% |
PV of Cash Flows |
|
|
1 |
95,882.48 |
0.909 |
87,165.89 |
|
|
2 |
100,676.61 |
0.826 |
83,203.81 |
|
|
3 |
105,710.44 |
0.751 |
79,421.82 |
|
|
4 |
110,995.96 |
0.683 |
75,811.73 |
|
|
5 |
116,545.76 |
0.621 |
72,365.75 |
|
|
6 |
122,373.04 |
0.564 |
69,076.39 |
|
|
7 |
128,491.70 |
0.513 |
65,936.56 |
|
|
8 |
134,916.28 |
0.467 |
62,939.44 |
|
|
9 |
141,662.10 |
0.424 |
60,078.56 |
|
|
10 |
148,745.20 |
0.386 |
57,347.71 |
|
|
Total |
713,347.66 |
Question b:
The computation in question a explains that the value of equity in both the methods, FCFF and FCFE is different because of the changes in the depreciation and amortization expenses, capital expenditure and interest expenses of the business. These factors have affected the total value of equity of the business (Higgins, 2012).
Assignment 3:
Question a:
|
Cost of Equity: CAPM model |
|
|
A. Risk free rate |
3.20% |
|
B. Market rate of return |
5.40% |
|
C. Beta |
1.3 |
|
D. CAPM |
6.06% |
Question b:
|
Valuation of equity taking free cash flows of firm |
|||
|
Past average |
|||
|
FCFF ($’000) |
5.00 |
||
|
Growth rate |
20.00% |
Applied for next 10 years |
|
|
Perpetual growth rate |
4.00% |
Applied after 10 years |
|
|
Estimated Free cash flows for firm |
|||
|
Year |
FCFF ($’ M) |
Remarks |
|
|
2018 |
6.00 |
=5*(1+20%) |
|
|
2019 |
7.20 |
||
|
2020 |
7.49 |
||
|
2021 |
7.79 |
||
|
2022 |
8.10 |
||
|
2023 |
8.42 |
||
|
2024 |
8.76 |
||
|
2025 |
9.11 |
||
|
2026 |
9.47 |
||
|
2027 |
9.85 |
||
|
Terminal cash flows |
10.25 |
=9.85*(1+4%) |
|
|
Present value of discrete cash flows for next 10 years |
|||
|
Year |
FCFF ($’000) |
PVF @6.06% |
PV of Cash Flows |
|
1 |
6.00 |
0.943 |
5.66 |
|
2 |
7.20 |
0.889 |
6.40 |
|
3 |
7.49 |
0.838 |
6.28 |
|
4 |
7.79 |
0.790 |
6.15 |
|
5 |
8.10 |
0.745 |
6.03 |
|
6 |
8.42 |
0.703 |
5.92 |
|
7 |
8.76 |
0.662 |
5.80 |
|
8 |
9.11 |
0.625 |
5.69 |
|
9 |
9.47 |
0.589 |
5.58 |
|
10 |
9.85 |
0.555 |
5.47 |
|
Total |
58.99 |
||
|
Present value of terminal cash flows |
|||
|
Terminal cash flows |
10.25 |
73.51 |
|
|
Total firm value |
132.50 |
||
|
Less: Value of Debt |
10.00 |
||
|
Total value of Equity |
122.50 |
||
|
No of Shares Outstanding |
10.00 |
||
|
Per share value of value of equity (intrinsic value) |
12.25 |
References:
Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
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