EBK INVESTMENTS
EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 18, Problem 16PS

a.

Summary Introduction

To calculate:The intrinsic value when GE’s P/E ratio starting in 2020 will be 16.

Introduction:

Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.Intrinsic Value of Stock=Intrinsic value of BusinessNo. of Outstanding Shares

  Intrinsic value of Business=FCFE1( 1+r)1+FCFE2( 1+r)2+..+Terminal value( 1+r)n

a.

Expert Solution
Check Mark

Answer to Problem 16PS

The intrinsic value when P/E ratio in the year 2020 is 16 will be $111868 and of FCFE will be $77595.80.

Explanation of Solution

Given information:

Spreadsheet 18.2 − Free cash flow model

      20162017201820192020
    A.Input data      
    P/E  14.3514.2514.1714.0814
    Cap spending'shr 2.652.72.822.933.05
    LT Debt 3000028500273332616725000
    Shares 18001800179817971795
    EPS 3.13.753.833.924
    Working capital 3682537750411734459748020
    Discount rate calculations
    Current beta0.95
    unlevered beta0.767
    terminal growth0.02
    tax_rate0.35
    r.debt0.036
    risk-free rate0.02
    market risk premium0.08

The formulas to be entered in the cells are as follows:

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  1

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  2

After inputing the required value in the cell related to G3, we get the following values.

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  3

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  4

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  5

Therefore the intrinsic value when P/E ratio in the year 2020 is 16 will be $111868 and of FCFE will be $77595.80

b.

Summary Introduction

To calculate: The intrinsic value when GE’s unlevered beta is 0.80.

Introduction:

Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.Intrinsic Value of Stock=Intrinsic value of BusinessNo. of Outstanding Shares

  Intrinsic value of Business=FCFE1( 1+r)1+FCFE2( 1+r)2+..+Terminal value( 1+r)n

b.

Expert Solution
Check Mark

Answer to Problem 16PS

The intrinsic value of FCFF is $113972 and FCFE is $79038.50.

Explanation of Solution

Given information:

Spreadsheet 18.2 − Free cash flow model

      20162017201820192020
    A.Input data      
    P/E  14.3514.2514.1714.0814
    Cap spending'shr 2.652.72.822.933.05
    LT Debt 3000028500273332616725000
    Shares 18001800179817971795
    EPS 3.13.753.833.924
    Working capital 3682537750411734459748020
    Discount rate calculations
    Current beta0.95
    unlevered beta0.767
    terminal growth0.02
    tax_rate0.35
    r.debt0.036
    risk-free rate0.02
    market risk premium0.08

The formulas to be entered in the cells are as follows:

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  6

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  7

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  8

We need to change the vaue of unlevered beta from 0.767 to 0.80. After inputing the required value in the cell related to B22, we get the following values.

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  9

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  10

Therefore, the intrinsic value of FCFF is $113972 and FCFE is $79038.50.

c.

Summary Introduction

To calculate: Intrinsic value when the market risk premium is 7.5%

Introduction:

Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.Intrinsic Value of Stock=Intrinsic value of BusinessNo. of Outstanding Shares

  Intrinsic value of Business=FCFE1( 1+r)1+FCFE2( 1+r)2+..+Terminal value( 1+r)n

c.

Expert Solution
Check Mark

Answer to Problem 16PS

The intrinsic value of FCFF will be$ 119921 and for FCFE it will be $83151.40.

Explanation of Solution

Given information:

Spreadsheet 18.2 − Free cash flow model

      20162017201820192020
    A.Input data      
    P/E  14.3514.2514.1714.0814
    Cap spending'shr 2.652.72.822.933.05
    LT Debt 3000028500273332616725000
    Shares 18001800179817971795
    EPS 3.13.753.833.924
    Working capital 3682537750411734459748020
    Discount rate calculations
    Current beta0.95
    unlevered beta0.767
    terminal growth0.02
    tax_rate0.35
    r.debt0.036
    risk-free rate0.02
    market risk premium0.08

The formulas to be entered in the cells are as follows:

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  11

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  12

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  13

We need to change the vaue of unlevered beta from 0.08 to 0.075. After inputing the required value in the cell related to B27, we get the following values.

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  14

  EBK INVESTMENTS, Chapter 18, Problem 16PS , additional homework tip  15

Therefore the intrinsic value of FCFE will be$ 119921 and for FCFE it will be $83151.40.

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