FCF1
VALUATION
COST OF
EQUITY
growth rate
=
=
500,000
4,500,000
=
=
15%
3.9%
(b) As it turns out, the dividend growth rate assumed by Francesca Giannetti is unrealistic; a
more realistic estimate is set at 1.5%. What dividend must Giannetti&C guarantee next year to
justify the same IPO price?
FCF1
VALUATION
COST OF
EQUITY
growth rate
=
=
607,500
4,500,000
=
=
15%
1.5%
Question 2:
TerminalV plc is a company producing computer terminals (e.g. printers). Its operating free
cash flows for the next five years are expected to be as follows:
Year
Operating FCF ($M)
1
20
2
70
3
130
4
160
5
180
From year 5 onwards the company is expected to growth at the GDP rate. The company has
debt of $500M and the market value of the equity is $2,000M.
(a) If the opportunity cost of capital for the assets (ie WACC) is 8% what is the implied GDP
growth rate?
Year
Operating FCF
($)
EQUITY VALUE
DEBT
20,000,000 70,000,000
2,000,000,
000
500,000,00
3
130,000,
000
4
5
160,000, 180,000,0
000
00
1 Piazza Affari is the name of the Milan Stock Exchange in Italian business
jargon. It is actually the address of the exchange and it means Business Square
1 out of 3
FIRM'S VALUE
WACC
DCF 1-4
SUM DCF 1-5
TV 5
FIRM'S VALUE
- SUM DCF 1-5
(1+WACC)^5
(FIRM'S VALUE
- SUM DCF 15)*(1+WACC)
^5
g
0
2,500,000,
000
8%
18,518,519 60,013,717
421,840,17
9
180,000,00
0
*
2,078,159,
821
=
1.5
=
=
103,198,
191
117,604,
776
122,504,9
75
(1+g)
3,053,498,
573
2.0%
(b) If the cost of equity is 9%, what is the interest rate TerminalV is paying on its debt?
Equity/Capital (%)
Debt/Capital (%)
COST OF EQUITY
WACC
COST OF DEBT
0.8
0.2
9%
8%
4%
Question 3:
Below are some financial data related to a group of companies operating in the cosmetics
industry:
Company
Company A
Company B
Company C
7.100
7.875
20.400
Share Outstanding
(#)
100,000
125,000
200,000
J. Tyler Inc. is expected to report earnings for $1.25M (one year from now) and is trading at
$120/share with 110,000 shares outstanding.
(a) Based exclusively on the information available, is J. Tyler Inc. likely to be trading at a
premium or a discount?
The stock seems to be overvalued based on P/E multiples relative even to the competitor with
higher earnings and bigger marcap, thus, most likely, itll trade at a discount.
Company
Market
Cap ($M)
Shares
outstandin
2 out of 3
EPS
($)
EARNING
S
P/E
g (#)
Company A
Company B
Company C
AVERAGE PEERS
J. Tyler Inc.
7,100,000
7,875,000
20,400,000
11,791,66
7
13,200,000
100,000
125,000
200,000
10.0
7.5
12.3
141,667
9.9
110,000
11.4
1,000,000
937,500
2,460,000
1,465,83
3
1,250,000
7.1
8.4
8.3
7.9
10.6
(b) The equity cost of capital for J. Tylers peer group is 15%. The company has decided to pay
dividends of 30% of total earnings for the foreseeable future. At what percentage must J. Tyler
Inc earnings grow in order to justify a share price of $120/share?
375,000
13,200,000
Dividend
FIRM'S VALUE
Cost of equity
g
15%
12%
Question 4:
Consider the stock of Kraner Inc., ticker symbol KRNR. The dividends of KRNR are
growing at 6% a year. The current risk-free rate is 5%. The price-dividend ratio is
P0/D0 = 20.
(a) What is KRNR's expected return?
(1+g)
D0/P0
r
1.06
0.05
11%
(b) If the CAPM holds and the market risk premium is 7% per year, what is the market beta of
KRNR?
0.86
(c) If the risk-free rate were 4%, how would the answer to part (b) change?
1.00
3 out of 3