BFN352 - 04 03 02 Mixed Valuation Problems - Variations (1)

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a) What is the value per share for this company if there are 3.5 million outstandin b) What is the justified trailing P/S today according to the valuation of a) ? c) If your estimate of FCFE over the last year is 4.2 M$, what constant perpetual g a) What is the value of a share of the company if there are 5.1 million outstandin b) How would the value be affected if you instead assumed that the constant gro a) What is the value of a share of the company based on your analysis? 04.201 - After carefully analysing their last financial statements, you estimate tha sales of 14.0 M$. You think that both FCFF and Sales should continue to grow at 9 5 should correspond to a trailing P/S of 6.1. The cost of debt was 6% before taxes equity of 11%. The company expects to maintain its target capital structure of 25 is currently 30%. They have issued bonds for a total face value of 55.0 M$ which (all % are per year) 04.202 - After carefully analysing their last financial statements, you estimate tha and that it should continue to grow at 15% for 3 years and at 3% forever after tha expects to maintain its target capital structure of 30% debt and 70% common eq rate in this country is 4%. The equity risk premium on this market is 5.2% and you the past 5 years of monthly returns. (all % are per year) 04.203 - The company PuffyPillows Inc. has sold 40 M$ worth of their dinosaur-th of 20%, their Net Income was 8 M$. You expect sales to grow at 25% for 3 years b following years. You estimate that the terminal value at year 6 will correspond to you also expect the profit margin to gradually decrease by 2% per year until it rea the investments in fixed capital needed every year will represent 16% of sales an of sales. Half of these increases in capital will be financed by new debt. Deprecia estimate that the required rate of return on equity is 10.8% and the WACC is 7.5% relevant % are per year)

b) If the current share price is 20.54 $/share, is the stock over, fairly or undervalu c) What are the justified forward and trailing P/E and P/S today according to the v a) What is the appropriate discount rate for the FCFF? b) What is the value of a share of the company based on a FCFF model? c) What is the justified trailing P/S of this company based on your model? d) Your colleague shares most of your assumptions about the future of this comp more reliable to instead forecast interest costs. Those were 15M$ before tax dur will grow at 10% per year. They think terminal value at year 6 should be calculate that the current market value for the debt of the company is 125M$. What is the 04.204 - The company SnoozyPillows Inc. has sold 70 M$ worth of their shark-the 40%, their EBITDA was 28 M$. After carefully analysing the company, you expect following years. After that, you estimate a perpetual growth rate of 3% for sales. years and then increase to 45% once the rapid growth phase of the company is o investments in fixed capital needed will represent 20% of sales for the next 3 yea depreciation that should represent 8% of sales for the next 3 years and only 4% a year should be about 6% of sales. Their cost of debt was 5% before taxes. The co 55% debt and 45% common equity. Their corporate tax rate is currently 35%. The market is 8%. You have measured a beta of 1.25 for the company based on the p company's debt is currently 298 M$ and there are 100 000 common shares outst

ng common shares? growth rate for FCFE would be coherent with the valuation you've found in a)? ng common shares? owth of FCFE started right now? at Patt&Mat Inc. had FCFF of 5.1 M$ over the last year and 9% for 5 years. You estimate that the terminal value at year s and using the CAPM you've found a required return on 5% debt and 75% common equity. Their corporate tax rate are worth 42.0 M$ given the current level of interest rates. at CompuThings Inc. had FCFE of 42.3 M$ over the last year at. Their cost of debt was 7% before taxes. The company quity. Their corporate tax rate is currently 35%. The risk-free u have measured a beta of 1.7 for the company based on hemed pillows over the last year. With a net profit margin before settling for a more reasonable 9% for the 3 o a trailing P/E of 9.1. Because of increased competition, aches 10% in 5 years and is stable after that. You think that nd the required increase in working capital will be about 5% ation should stay at about 4% of sales. Using the CAPM, you %. There are 4.5 million shares and the tax rate is 35%. (all

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ued? valuation of a) ? pany except for Net Borrowing. They think it would be ring the last year and your colleague estimates that they ed based on a trailing EV/Sales of 2.4. They have verified e value of a share of the company based on their analysis? emed pillows over the last year. With an EBITDA margin of t sales to grow at 35% for 2 years and at 8% for the 2 You expect EBITDA margin to stay at the current level for 2 over. Because of new projects, you think that the ars and only 12% of sales after that. This will result in a after that. The required increase in working capital every ompany expects to soon reach its target capital structure of e risk-free rate is 3% and the expected return for the past 5 years of monthly returns. The market value of the tanding. (all relevant % are per year)

a) What is the value per share for this company if there are 3.5 million outstandin Cost of equity 11.0000% Growth 0y to 5y 9% Debt Pref. Sh. Comm. Sh. weight 25% 0% 75% cost 4.20000% 0.00 11.00% WACC 9.30000% in M$ year 0 1 Sales 14 15.26 FCFF 5.1 5.559 Terminal Value for a trailing P/S of 6.1 FCFF discount factor 0.9149130833 PV of FCFE+TV 5.0860018298 Firm value in M$ 109.525206688484 Market Value of debt (M$) 42.00 Equity value in M$ 67.52521 n shares (in M) 3.5 Value per share $ 19.29 Answer $ 19.29 per share b) What is the justified trailing P/S today according to the valuation of a) ? Justified Trailing P/S 4.82 c) If your estimate of FCFE over the last year is 4.2 M$, what constant perpetual g 04.201 - After carefully analysing their last financial statements, you estimate tha sales of 14.0 M$. You think that both FCFF and Sales should continue to grow at 9 5 should correspond to a trailing P/S of 6.1. The cost of debt was 6% before taxes equity of 11%. The company expects to maintain its target capital structure of 25 is currently 30%. They have issued bonds for a total face value of 55.0 M$ which (all % are per year)

FCFE -> growing perpetuity (like GGM) FCFE0 4.20 M$ g 4.5002% FCFE1 4.39 M$ Equity value 67.52521 M$ Answer 4.5002% per year a) What is the value of a share of the company if there are 5.1 million outstandin CAPM r=E(Ri) Rf Bi 12.84% 4% 1.70 Cost of equity 12.84% Growth 0y to 3y 15.0% Growth 4y to infinity 3.0% year 0 1 in M$ FCFE 42.3 48.645 Terminal Value GGM Equity discount factor 0.8862105636 PV of FCFE+TV 43.109712868 Equity value $ 600.51 M$ n shares 5.1 millions Value per share $ 117.75 Answer $ 117.75 per share 04.202 - After carefully analysing their last financial statements, you estimate tha and that it should continue to grow at 15% for 3 years and at 3% forever after tha expects to maintain its target capital structure of 30% debt and 70% common eq rate in this country is 4%. The equity risk premium on this market is 5.2% and you the past 5 years of monthly returns. (all % are per year)

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b) How would the value be affected if you instead assumed that the constant gro FCFE -> growing perpetuity (like GGM) FCFE0 42.30 M$ g 3.0000% FCFE1 43.57 M$ Equity value 442.77439 M$ Change (%) -26.27% Answer A share would be worth 26.2672% less. a) What is the value of a share of the company based on your analysis? r 10.80% We only have enough data to (in M$) t 0 1 2 Sales 40.00 50.00 62.50 Sales growth from previous year 25% 25% Net profit margin 20% 18% #NAME? % of sales Net Income 8.00 9.00 #NAME? 16% FCInv 6.40 8.00 10.00 5% WCInv 2.00 2.50 3.13 4% Dep 1.60 2.00 2.50 Net Borrowing 4.20 5.25 6.56 FCFE 5.40 5.75 #NAME? Calculated FCFE growth 6% #NAME? Make sure to show all your ca Terminal value Trailing P/E of 9.1 PV factor 0.9025 0.8146 PV of CF 5.1895 #NAME? 04.203 - The company PuffyPillows Inc. has sold 40 M$ worth of their dinosaur-th of 20%, their Net Income was 8 M$. You expect sales to grow at 25% for 3 years b following years. You estimate that the terminal value at year 6 will correspond to you also expect the profit margin to gradually decrease by 2% per year until it rea the investments in fixed capital needed every year will represent 16% of sales an of sales. Half of these increases in capital will be financed by new debt. Deprecia estimate that the required rate of return on equity is 10.8% and the WACC is 7.5% relevant % are per year)

Equity value 71.06 M$ n shares 4.5 M Value of a share $15.79 Answer 15.79 $/share b) If the current share price is 20.54 $/share, is the stock over, fairly or undervalu Answer Overvalued according to your analysis. c) What are the justified forward and trailing P/E and P/S today according to the v Justified Trailing P/E 8.88 Justified Forward P/E 7.90 Justified Trailing P/S 1.78 Justified Forward P/S 1.42 WACC 7.50% Based on what your colleague Tax rate 35% Int growth 10% (in M$) t 0 1 2 Sales 40.00 50.00 62.50 Sales growth from previous year 25% 25% Net profit margin 20% 18% #NAME? % of sales Net Income 8.00 9.00 #NAME? 16% FCInv 6.40 8.00 10.00 5% WCInv 2.00 2.50 3.13 4% Dep 1.60 2.00 2.50 Int 15.00 16.50 18.15 FCFF 10.95 11.23 #NAME? Calculated FCFF growth 3% #NAME? Make sure to show all your ca Terminal value Trailing EV/Sales of 2.4 d) Your colleague shares most of your assumptions about the future of this comp more reliable to instead forecast interest costs. Those were 15M$ before tax dur will grow at 10% per year. They think terminal value at year 6 should be calculate that the current market value for the debt of the company is 125M$. What is the

PV factor 0.9302 0.8653 PV of CF 10.4419 #NAME? Firm value 206.5218 M$ Market value of debt 125 M$ Equity value 81.52 M$ n shares 4.5 M Value of a share $18.12 Answer 18.12 $/share a) What is the appropriate discount rate for the FCFF? Debt Pref. Sh. Comm. Sh. weight 55% 0% 45% cost 3.2500% 0.00 9.25% WACC 5.9500% Answer 5.9500% per year b) What is the value of a share of the company based on a FCFF model? t 0 1 2 Sales (M$) 70.00 94.50 127.58 Sales growth from previous year 35% 35% EBITDA margin 40% 40% 40% EBITDA (M$) 28.00 37.80 51.03 FCInv (% of Sales) 20% 20% FCInv (M$) 18.90 25.52 04.204 - The company SnoozyPillows Inc. has sold 70 M$ worth of their shark-the 40%, their EBITDA was 28 M$. After carefully analysing the company, you expect following years. After that, you estimate a perpetual growth rate of 3% for sales. years and then increase to 45% once the rapid growth phase of the company is o investments in fixed capital needed will represent 20% of sales for the next 3 yea depreciation that should represent 8% of sales for the next 3 years and only 4% a year should be about 6% of sales. Their cost of debt was 5% before taxes. The co 55% debt and 45% common equity. Their corporate tax rate is currently 35%. The market is 8%. You have measured a beta of 1.25 for the company based on the p company's debt is currently 298 M$ and there are 100 000 common shares outst

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WCInv (% of Sales) 6% 6% WCInv (M$) 5.67 7.65 Dep (% of Sales) 8% 8% Dep (M$) 7.56 10.21 FCFF (M$) 2.65 3.57 Calculated FCFF growth 35% Terminal value PV Factor 0.9438414346 0.8908366537 PV of CFs 2.4974 3.1822 Firm Value 549.1994 M$ Debt value 298.0000 M$ Equity value 251.1994 n shares 100000 Answer Value per share $ 2,511.99 per share c) What is the justified trailing P/S of this company based on your model? Answer 3.5886

ng common shares? 2 3 4 5 16.6334 18.130406 19.76214254 21.540735369 6.05931 6.6046479 7.199066211 7.84698217 131.39848575 0.8370659499 0.7658425891 0.7006794045 0.6410607544 5.072042081 5.058120648 5.0442374257 89.264804704 growth rate for FCFE would be coherent with the valuation you've found in a)? at Patt&Mat Inc. had FCFF of 5.1 M$ over the last year and 9% for 5 years. You estimate that the terminal value at year s and using the CAPM you've found a required return on 5% debt and 75% common equity. Their corporate tax rate are worth 42.0 M$ given the current level of interest rates.

ng common shares? [E(Rm)-Rf)] 5.2% Make sure to show all your calculations on the exam… 2 3 4 55.94175 64.3330125 66.263002875 673.40450076 0.7853691631 0.6960024487 43.934925379 513.46711571 at CompuThings Inc. had FCFE of 42.3 M$ over the last year at. Their cost of debt was 7% before taxes. The company quity. Their corporate tax rate is currently 35%. The risk-free u have measured a beta of 1.7 for the company based on

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owth of FCFE started right now? build a FCFE model, which is discounted at r. 3 4 5 6 78.13 85.16 92.82 101.17 25% 9% 9% 9% #NAME? #NAME? #NAME? 10% #NAME? #NAME? #NAME? 10.12 12.50 13.63 14.85 16.19 3.91 4.26 4.64 5.06 3.13 3.41 3.71 4.05 8.20 8.94 9.75 10.62 #NAME? #NAME? #NAME? 3.54 #NAME? #NAME? #NAME? #NAME? alculations on the exam… 92.0685 0.7352 0.6635 0.5988 0.5405 #NAME? #NAME? #NAME? 51.6729 hemed pillows over the last year. With a net profit margin before settling for a more reasonable 9% for the 3 o a trailing P/E of 9.1. Because of increased competition, aches 10% in 5 years and is stable after that. You think that nd the required increase in working capital will be about 5% ation should stay at about 4% of sales. Using the CAPM, you %. There are 4.5 million shares and the tax rate is 35%. (all

ued? valuation of a) ? e wants to forecast, we need a FCFF model. FCFF are discounted at the WACC. 3 4 5 6 78.13 85.16 92.82 101.17 25% 9% 9% 9% #NAME? #NAME? #NAME? 10% #NAME? #NAME? #NAME? 10.12 12.50 13.63 14.85 16.19 3.91 4.26 4.64 5.06 3.13 3.41 3.71 4.05 19.97 21.96 24.16 26.57 #NAME? #NAME? #NAME? 10.19 #NAME? #NAME? #NAME? #NAME? alculations on the exam… 242.8179 pany except for Net Borrowing. They think it would be ring the last year and your colleague estimates that they ed based on a trailing EV/Sales of 2.4. They have verified e value of a share of the company based on their analysis?

0.8050 0.7488 0.6966 0.6480 #NAME? #NAME? #NAME? 163.9398 CAPM r=E(Ri) Rf Bi [E(Rm)-Rf)] 9.3% 3% 1.25 5.0% T= 35% 3 4 5 6 137.78 148.80 153.27 157.87 8% 8% 3% 3% 45% 45% 45% 45% 62.00 66.96 68.97 71.04 20% 12% 12% 12% 27.56 17.86 18.39 18.94 emed pillows over the last year. With an EBITDA margin of t sales to grow at 35% for 2 years and at 8% for the 2 You expect EBITDA margin to stay at the current level for 2 over. Because of new projects, you think that the ars and only 12% of sales after that. This will result in a after that. The required increase in working capital every ompany expects to soon reach its target capital structure of e risk-free rate is 3% and the expected return for the past 5 years of monthly returns. The market value of the tanding. (all relevant % are per year)

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6% 6% 6% 6% 8.27 8.93 9.20 9.47 8% 4% 4% 4% 11.02 5.95 6.13 6.31 8.34 18.82 19.39 19.97 FCFF=EBITDA(1-T) 133% 126% 3% 3% 676.94914947 Here, since sales grow at 3% forever and all the other varia 0.8408085453 0.7935899436 0.7490230709 7.0088 14.9383 521.5729

)+Dep(T)-FCInv-WCInv ables remain the same proportion to sales, FCFF will also grow at 3% forever.