Scribd
Upload
274 views3 pages

Ficha 4

This document contains 6 questions regarding corporate valuation models: 1. The first question values Kimberly-Clark using the dividend discount model and free cash flow to equity model. 2. The second question values Ecolab using a two-stage free cash flow to equity model. 3. The third question values Dionex Corporation using a two-stage free cash flow to equity model. 4. The fourth question values Union Pacific Railroad using a free cash flow to the firm steady state model. 5. The fifth question values Lockheed Corporation using a two-stage free cash flow to the firm model. 6. The sixth question values Eastman Kodak's health division using

Uploaded by

Elsa Machado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
274 views3 pages

Ficha 4

This document contains 6 questions regarding corporate valuation models: 1. The first question values Kimberly-Clark using the dividend discount model and free cash flow to equity model. 2. The second question values Ecolab using a two-stage free cash flow to equity model. 3. The third question values Dionex Corporation using a two-stage free cash flow to equity model. 4. The fourth question values Union Pacific Railroad using a free cash flow to the firm steady state model. 5. The fifth question values Lockheed Corporation using a two-stage free cash flow to the firm model. 6. The sixth question values Eastman Kodak's health division using

Uploaded by

Elsa Machado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Corporate Valuation

Master course

School of Economics and Management

DCF models
Questions

1. Constant Growth FCFE Model


Kimberly-Clark, a household product manufacturer, reported earnings per share of $3.20 in 1993, and paid
dividends per share of $1.70 in that year. The firm reported depreciation of $315 million in 1993, and capital
expenditures of $475 million. (There were 160 million shares outstanding, trading at $51 per share.) This
ratio of capital expenditures to depreciation is expected to be maintained in the long term. The working capital
needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billion, and intends to maintain its current
financing mix (of debt and equity) to finance future investment needs. The firm is in steady state and earnings
are expected to grow 7% a year. The stock had a beta of 1.05. (The treasury bond rate is 6.25%.)

(a) Estimate the value per share, using the Dividend Discount Model.
(b) Estimate the value per share, using the FCFE Model.
(c) How would you explain the difference between the two models, and which one would you use as your
benchmark for comparison to the market price?

2. Two-Stage FCFE Model: Basics


Ecolab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per
share of $2.35 in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998, and 6% a year
after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993.
Both are expected to grow at the same rate as earnings from 1994 to 1998. Working capital is expected to
remain at 5% of revenues, and revenues which were $1,000 million in 1993 are expected to increase 6% a
year from 1994 to 1998, and 4% a year after that. The firm currently has a debt ratio (D/(D+E)) of 5%, but
plans to finance future investment needs (including working capital investments) using a debt ratio of 20%.
The stock is expected to have a beta of 1.00 for the period of the analysis, and the treasury bond rate is
6.50%. (There are 63 million shares outstanding.)

(a) Assuming that capital expenditures and depreciation offset each other after 1998, estimate the value
per share.
(b) Assuming that capital expenditures continue to be 200% of depreciation even after 1998, estimate the
value per share.
(c) What would the value per share have been, if the firm had continued to finance new investments with
its old financing mix (5%)? Is it fair to use the same beta for this analysis?

3. Two-Stage FCFE Model: An Extended Application


Dionex Corporation, a leader in the development and manufacture of ion chromography systems (used to
identify contaminants in electronic devices), reported earnings per share of $2.02 in 1993, and paid no
dividends. These earnings are expected to grow 14% a year for five years (1994 to 1998) and 7% a year after
that. The firm reported depreciation of $2 million in 1993 and capital spending of $4.20 million, and had 7
million shares outstanding. The working capital is expected to remain at 50% of revenues, which were $106

1
million in 1993, and are expected to grow 6% a year from 1994 to 1998 and 4% a year after that. The firm is
expected to finance 10% of its capital expenditures and working capital needs with debt. Dionex had a beta
of 1.20 in 1993, and this beta is expected to drop to 1.10 after 1998. (The treasury bond rate is 7%.)

(a) Estimate the expected free cash flow to equity from 1994 to 1998, assuming that capital expenditures
and depreciation grow at the same rate as earnings.
(b) Estimate the terminal price per share (at the end of 1998). Stable firms in this industry have capital
expenditures which are 150% of depreciation, and maintain working capital at 25% of revenues.
(c) Estimate the value per share today, based upon the FCFE model.

4. FCFF Steady State Model


Union Pacific Railroad reported net income of $770 million in 1993, after interest expenses of $320 million.
(The corporate tax rate was 36%.) It reported depreciation of $960 million in that year, and capital spending
was $1.2 billion. The firm also had $4 billion in debt outstanding on the books, rated AA (carrying a yield to
maturity of 8%), trading at par (up from $3.8 billion at the end of 1992). The beta of the stock is 1.05, and
there were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Union
Pacific’s working capital requirements are negligible. (The treasury bond rate is 7%.)

(a) Estimate the free cash flow to the firm in 1993.


(b) Estimate the value of the firm at the end of 1993.
(c) Estimate the value of equity at the end of 1993, and the value per share, using the FCFF approach.

5. Two-Stage FCFF Model: Lockheed Corporation


Lockheed Corporation, one of the largest defense contractors in the U.S., reported EBITDA of $1290 million
in 1993, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital Expen-
ditures in 1993 amounted to $450 million, and working capital was 7% of revenues (which were $13,500
million). The firm had debt outstanding of $3.068 billion (in book value terms), trading at a market value of
$3.2 billion, and yielding a pre-tax interest rate of 8%. There were 62 million shares outstanding, trading at
$64 per share, and the most recent beta is 1.10. The tax rate for the firm is 40%. (The treasury bond rate is
7%.)
The firm expects revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from 1994
to 1998, after which the growth rate is expected to drop to 4%. (Capital spending will offset depreciation in
the steady state period.) The company also plans to lower its debt/equity ratio to 50% for the steady state
(which will result in the pre-tax interest rate dropping to 7.5%.)

(a) Estimate the value of the firm.


(b) Estimate the value of the equity in the firm and the value per share.

6. Valuing a Division
In the face of disappointing earnings results and increasingly assertive institutional stockholders, Eastman
Kodak was considering a major restructuring in 1993. As part of this restructuring, it was considering the sale
of its health division, which earned $560 million in earnings before interest and taxes in 1993, on revenues
of $5.285 billion. The expected growth in earnings was expected to moderate to 6% between 1994 and
1998, and to 4% after that. Capital expenditures in the health division amounted to $420 million in 1993,
while depreciation was $350 million. Both are expected to grow 4% a year in the long term. Working capital
requirements are negligible.
The average beta of firms competing with Eastman Kodak’s health division is 1.15. While Eastman Kodak
has a debt ratio (D/(D+E)) of 50%, the health division can sustain a debt ratio (D/(D+E)) of only 20%, which
is similar to the average debt ratio of firms competing in the health sector. At this level of debt, the health
division can expect to pay 7.5% on its debt, before taxes. (The tax rate is 40%, and the treasury bond rate is
7%.)

2
(a) Estimate the cost of capital for the division.
(b) Estimate the value of the division.
(c) Why might an acquirer pay more than this estimated value?

From Valuation Problem Sets, by A. Damodaran, available at https://pages.stern.nyu.edu/~adamodar/New_Home_


Page/problems/dcfprob.htm

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