The discounted cash flow model and the corporate valuation model are the most widely used valuation techniques. Often these valuationsare accompanied by market multiple analysis, which is based on the fundamental concept that sinar assets should have simlar values.Carlson Co, is a privately owned firm with few investors. Investors forecast their eamings per share (EPS) to reach $3 this coming year The averageprice-to-earnings (P/E) ratio for similar companies in the S&P 500 is 11.The estimated intrinsic value of Carlson Co.'s stock will beMarket multiple analysis is also used to calculate the value of a company, which is further used to calculate the intrinsic vakre per share of the fimSuppose you have the information given in the following table for Company X.EBITDATotal value of equityTotal firm valueper share.Year 1Year 2$10,680$12,375$121,500$112,500$182,250 $202,500 anket multiple analysis is also used to calculate the value of a company, which is further used to calculate the intrinsic valun per share of the famSuppose you have the information given in the following table for Company X.EBITDATotal value of equityTotal firm valueYear 1Year 2$10,680$12,375$121,500$112,500$182,250 $202,500What is value of the entity multiple of Company X in Year 17O 17.06O22.18O 16:36O 11.38Stare.Grade It NowSave & ContinueContinue without saving

The value of any asset or the company is its worth in currency in present terms. The value can be…

Suppose you have the information given in the following table for Company X. EBITDA Total value of equity Total firm value to calculate the value of a company, which is further used to calculate the intrinsic value per share of the fem O 17.06 O22.18 O 16.36 O 11.38 Year 1 Year 2 $10,680 $12,375 $121,500 $112,500 $182,250 $202,500 What is value of the entity multiple of Company X in Year 17 Grade It Now Save & Continue Comen without spint

Suppose you have the information given in the following table for Company X. EBITDA Total value of equity Total firm value to calculate the value of a company, which is further used to calculate the intrinsic value per share of the fem O 17.06 O22.18 O 16.36 O 11.38 Year 1 Year 2 $10,680 $12,375 $121,500 $112,500 $182,250 $202,500 What is value of the entity multiple of Company X in Year 17 Grade It Now Save & Continue Comen without spint

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.
When using the capital asset pricing model to estimate the cost of equity for a firm being valued, beta is often adjusted to account for: Debt ratios of comparable firms that are leveraged differently from that of the firm being valued. The level of cash held at comparable firms. The number of common stock shares outstanding at comparable firms. The default rate of corporate bonds over the last year. All of the above.
K-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…
You are now an equity analyst. We now find that the actual valuation of Company X is 130. Your manager suggests basing the price on a discounted dividend model and a discounted free cash flow valuation method. However, these two methods may produce very different estimates when applied to actual data. The discounted dividend model works out to a price of 60, while the discounted free cash flow valuation method works out to a price of 10. Question: Explain to your management why the two valuation methodologies provide different estimations. Specifically, discuss the assumptions implicit in the two methodologies, as well as the assumptions you made when doing your analysis. Why do these projections differ from Company X's current stock price?
The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the corporate valuation model. The market value of a firm is equal to the present value of its expected future free cash flows plus the market value of its non-operating assets: Market value FCF, Market value of company's FCF0 + (1+WACC) FCF2 +...+ of company (1+WACC)! (1+WACC)? non-operating assets Free cash flows are generally forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash flow will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a constant rate, the equation to calculate the continuing value of the firm's operations at that date is: Horizon value = VCompany's operations at t = N= FCFN+1/(WACC-8FCF) Discount the free cash flows back at…
Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 9%.The risk-free rate is currently 4%. Craft's dividend per share for each of the past 6 years is shown in the following table: a. Given that Craft is expected to pay a dividend of $3.87 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.) b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2017-2022 period. (2) A decrease in its risk premium to 8%.
Which of the following assumptions are necessary for AFN equation to work? 1) The ratios A0/S and LO/S, the profit margin, and payout ratio are stable. 2) Common stock and long-term debt are tied directly to sales. 3) None of the firm's ratios will change. 4) Fixed assets, but not current assets, are tied directly to sales. 5) Last year's total assets were not optimal for last year's sales.
If a firm cannot invest retained earnings to earn a rate of returngreater than or equal to the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Burris Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Taylor’s bonds yield 11.52%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylor’s cost of internal equity is: 18.84% 15.07% 14.32% 18.08% The…
An analyst has estimated the value of a company using two valuation methodologies. The discounted cash flow (DCF) value is $200 million, comparable recent transactions’ value is $225 million. The purchase price paid for the recent comparable transaction included a 20% premium. The analyst has greater confidence in the comparable transaction method and therefore gives a weight of 60% to this methodology, with 40% weight to the discounted cash flow methodology. Estimate the weighted average value of the firm using these two valuation methodologies and using the weights or relative importance the analyst gives to each methodology.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? 1. b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. 2. d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. 3. e. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash. 4. a. Use cash to increase inventory holdings. 5. c. Use cash to repurchase some of the company's own stock.
You have been hired as a consultant by Capital Pricing Company's CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: risk free rate = 5%; market risk premium = 9.3%; and beta = 1.12. Based on the CAPM approach, what is the cost of common stock from reinvested earnings?
Investors and financial analysts wanting to evaluate the operation efficiency of a firm's managers would probably look primarily at the firm's A. Leverage/debt ratios. market value ratios. 11. B. asset management ratios. D. liquidity ratios. C. 12. in a non-interest bearing account, this will tend to lower the firm's A. profit margin. B. return on equity. C. debt ratio. Other things held constant, if a firm holds cash balances in excess of their optimal level D. current ratio.