Suppose that the date is 1 January 2022, and you are considering making an investment in General Electric (NYSE: GE). You are given the following information and assumptions to assist you with your valuation analysis: FY2022 revenue (i.e., for the 12-month period from 1 January 2022 to 31 December 2022) is forecast to be $80 billion, compared to actual FY2021 revenue of $75 billion. EBIT, depreciation & amortization (D&A) and capital expenditure dedicated solely for new investments/projects (i.e., growth capital expenditure) is expected to remain fixed (as a percentage of total revenues) at 15%, 5% and 3% respectively. The level of operating working capital needed for GE’s ordinary business operations historically as well as in the future is equal to 1% of total revenues. GE currently has $75 billion in debt outstanding, $40 billion in cash on hand and 9 billion shares outstanding. Assume that GE faces an effective corporate tax rate of 25%. Assume that GE’s long-term reinvestment rate is equal to its FY2022 reinvestment rate and that GE’s long-term return on reinvested capital is expected to be 2% above GE’s estimated weighted average cost of capital (WACC) of 7%. Part A: Using the information above, please estimate the equity value per share of General Electric (NYSE: GE) as at 1 January 2022. Part B: Suppose you observe that equity analysts covering GE stock believe that, based on publicly traded comparable firms, GE should trade at an average forward 2022E EV/EBITDA multiple of 10.0x. Using a multiples-based valuation approach, show numerically whether your systematic risk and growth assumptions in Part A are relatively more conservative or optimistic compared to equity analysts covering GE stock.
Suppose that the date is 1 January 2022, and you are considering making an investment in General Electric (NYSE: GE). You are given the following information and assumptions to assist you with your valuation analysis: FY2022 revenue (i.e., for the 12-month period from 1 January 2022 to 31 December 2022) is forecast to be $80 billion, compared to actual FY2021 revenue of $75 billion. EBIT, depreciation & amortization (D&A) and capital expenditure dedicated solely for new investments/projects (i.e., growth capital expenditure) is expected to remain fixed (as a percentage of total revenues) at 15%, 5% and 3% respectively. The level of operating working capital needed for GE’s ordinary business operations historically as well as in the future is equal to 1% of total revenues. GE currently has $75 billion in debt outstanding, $40 billion in cash on hand and 9 billion shares outstanding. Assume that GE faces an effective corporate tax rate of 25%. Assume that GE’s long-term reinvestment rate is equal to its FY2022 reinvestment rate and that GE’s long-term return on reinvested capital is expected to be 2% above GE’s estimated weighted average cost of capital (WACC) of 7%. Part A: Using the information above, please estimate the equity value per share of General Electric (NYSE: GE) as at 1 January 2022. Part B: Suppose you observe that equity analysts covering GE stock believe that, based on publicly traded comparable firms, GE should trade at an average forward 2022E EV/EBITDA multiple of 10.0x. Using a multiples-based valuation approach, show numerically whether your systematic risk and growth assumptions in Part A are relatively more conservative or optimistic compared to equity analysts covering GE stock.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that the date is 1 January 2022, and you are considering making an investment in General Electric (NYSE: GE). You are given the following information and assumptions to assist you with your valuation analysis:
- FY2022 revenue (i.e., for the 12-month period from 1 January 2022 to 31 December 2022) is
forecast to be $80 billion, compared to actual FY2021 revenue of $75 billion. - EBIT, depreciation & amortization (D&A) and capital expenditure dedicated solely for new investments/projects (i.e., growth capital expenditure) is expected to remain fixed (as a percentage of total revenues) at 15%, 5% and 3% respectively.
- The level of operating working capital needed for GE’s ordinary business operations historically as well as in the future is equal to 1% of total revenues.
- GE currently has $75 billion in debt outstanding, $40 billion in cash on hand and 9 billion shares outstanding. Assume that GE faces an effective corporate tax rate of 25%.
- Assume that GE’s long-term reinvestment rate is equal to its FY2022 reinvestment rate and that GE’s long-term return on reinvested capital is expected to be 2% above GE’s estimated weighted average cost of capital (WACC) of 7%.
Part A: Using the information above, please estimate the equity value per share of General Electric (NYSE: GE) as at 1 January 2022.
Part B: Suppose you observe that equity analysts covering GE stock believe that, based on publicly traded comparable firms, GE should trade at an average forward 2022E EV/EBITDA multiple of 10.0x. Using a multiples-based valuation approach, show numerically whether your systematic risk and growth assumptions in Part A are relatively more conservative or optimistic compared to equity analysts covering GE stock.
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