Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month: Call options on wheat are selling at a premium of R0.87 per ton. Put options on wheat are selling for R0.72 per ton. Given the information above, will you need need a call or a put option? If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton.
Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month:
- Call options on wheat are selling at a premium of R0.87 per ton.
- Put options on wheat are selling for R0.72 per ton.
- Given the information above, will you need need a call or a put option?
- If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton.
You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information:
Table 1: FBC
|
|
2018 |
2017 |
|
Cash and equivalents |
R149 |
R83 |
|
Accounts receivable |
295 |
265 |
|
Inventory |
275 |
285 |
|
Total current assets |
R719 |
R633 |
|
|
|
|
|
Total fixed assets |
3 909 |
3 856 |
|
|
|
|
|
Accounts payable |
228 |
220 |
|
Notes payable |
0 |
0 |
|
Total current liabilities |
228 |
220 |
|
|
|
|
|
Long term debt |
1 800 |
1 650 |
|
|
|
|
|
Total liabilities and shareholders equity |
3 909 |
3 856 |
|
Number of shares outstanding (millions) |
100 |
100 |
Additional information:
Depreciation (2018): R483.- The firm spent R250m in profitable projects during the course of 2018
- WACC : 15%
Cost of equity of the firm: 10%- Tax rate : 40%
Table 2: FBC statement of comprehensive income
(R millions except for share data)
|
|
2018 |
2017 |
|
Total revenues |
R3 175 |
R3 075 |
|
EBIT |
495 |
448 |
|
Interest expense |
104 |
101 |
|
Net Income |
235 |
208 |
|
Dividends per share |
R0.80 |
R0.80 |
Use the information given, to answer the following:
- Calculate the
Free Cash Flow to the Firm (FCFF) for the year 2018. - You are told that the Free Cash Flow to Equity (FCFE) of the firm will continue to grow at a rate of 5% for the next 3 years, after which it will stabilize to a rate of 3%. Calculate the intrinsic value of each of FBC’ shares. 9 (Use 2.d.p in your calculations & final answer for this question)
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