Scribd
Upload
64 views2 pages

Answers To Tutorial 2

This document summarizes solutions to 5 tutorial cases on corporate finance topics: 1) Calculating financial ratios, cost of equity, and effects of financial leverage on growth. 2) Using a two-stage dividend discount model to value a stock. 3) Valuing a firm using forecasted free cash flows and industry price-to-operating cash flow multiples. 4) Applying a two-stage dividend discount model and interpreting the proportion of value from growth opportunities. 5) Valuing shares based on operating performance and investing performance using an EPS/ke + PVGO model.

Uploaded by

lkishs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
64 views2 pages

Answers To Tutorial 2

This document summarizes solutions to 5 tutorial cases on corporate finance topics: 1) Calculating financial ratios, cost of equity, and effects of financial leverage on growth. 2) Using a two-stage dividend discount model to value a stock. 3) Valuing a firm using forecasted free cash flows and industry price-to-operating cash flow multiples. 4) Applying a two-stage dividend discount model and interpreting the proportion of value from growth opportunities. 5) Valuing shares based on operating performance and investing performance using an EPS/ke + PVGO model.

Uploaded by

lkishs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

FIN208: Answers to Tutorial 2

Case 1

a) NI/sales = 80/598 = 13.38%


Sales/assets = 598/815=0.7337
Assets/equity =815/674 =1.2092

c) g=[RR(ROE)]/ [1- (RRxROE )]= [0.7x11.87% / [1-(0.7x11.87)] =0.0831/0.9169 =


9.06%

d) director A : g↓ because RR↓


director B: g ↑because financial leverage ↑

e) D0 = 0.286
D1=0.286 (1.32) = 0.377
D2 =0.377 (1.32) = 0.498
D3 =0.498 (1.13) =0.56
P0 = 0.377/1.14 + 0.498/1.142 + [ 0.56/(0.14-0.13)]/1.142
= 43.98

Case 2

a) P0 = 0.5/1.12 + 0.6/1.12^2 + 1.15/1.12^3 + [1.24/(0.12-0.08)]/1.12^3


=23.81
b) Discounted value of P3 = [1.24/(0.12-0.08)]/1.12^3= 22.07
c) P3 = 31. Split the value into the two components : the no-growth component is
E4/k = 2.49/0.12 = 20.75, so the PVGO component is 31-20.75 = 10.25
d) In this case, the PVGO3 = 10.25 will disappear (become zero) and the impact of
this on the stock value is that the stock price will drop by the present value of
10.25 which is 10.25/1.12^3=7.30.
The new stock price will be 23.81 – 7.30 = 16.51

Case 3

i) FCF to the firm = (550 – 110) + 60 + 25 -160 – 95 -10 = 260m

ii) P/OCF from the industry average = (12.5+14) / 2 = 13.25


TV in year 2 = (P/OCF) OCFyear2 = 13.25 x 750m = 9937.50m

iii) V firm = [260(1.05)] / 1.08 + [260(1.05)2} / 1.082 + 9937.50 / 1.082 = 252.78 + 245.76 +
8519..80 = 9018.34 million
Vequity = V firm – V debt = 9018.34 – 2400 = 6618.34
Fair price per share = 6618.34 / 80 = $82.73

iv) FCF not readily available like dividends


Value derived depends too much on the terminal value (the second stage) in which the
estimation is subject to further distance value.
FCF may be negative for firms with high growth opportunities.

Case 4
a) (i) 2-stage DDM:

P0 = 0.74/1.11 + 0.74/1.112 + 1.85/1.113 + {[1.85(1.08)]/0.11-0.08}/1.113


= 51.37
(ii) and (iii) PVGO = V - (E1/k)
= 75 – (3.19/0.11)
=75 – 29
=46 -----Interpret : 46/75 = 61% of the price that investors are willing to pay for the
stock is due to the expected growth opportunities especially after the signing of the new
marketing agreement to expand the products to China. Since more than half of the market
value of the stock is derived from the expected growth, the stock could now be deemed as
a growth stock rather than an income stock. The expansion into China is perceived by the
market as being able to generate + NPV for the company in the years to come. The
successful of signing the agreement in this case is considered as helping the company to
create its competitive advantage in this area particularly if the competitors were not
successful in the deal.

Case 5

Based on the facts given, students may value the shares based on investors’ willingness to
pay for both future operating performance as well as investing performance, by using
following model:

P0 = EPS/k + PVGO

From DPS=$0.15 and RR=0.7, we can calculate the EPS = 0.15/(1-0.7) = 0.15/0.3=0.50

 P0 = EPS/ke + 0.8 (P0 )

P0 = (0.5/0.12)/0.20 = $20.83

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy