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##### FIN - Valuation and Capital Investment problems

**Description**

solution

**Question**

Question;Please answer each of;the following questions on an Excel spreadsheet. Each question should be;on a separate tab and be sure to document all your work and calculations.;Clearly identify;the final answers by highlighting those cells in yellow.;1. The Gersin Gear;Company is considering going public and is trying to determine its value;based on its future dividend payments. Their current EPS is $7.75, and over the;next 5 years they anticipate a payout ratio of 10% and ROE of 20%.;During this high-growth period, their beta is estimated at 1.25, with a;risk-free rate of 2.5% and a marker risk premium of 6%. At the end of;the 5-year high growth period, they estimate their stable beta will be 1.00;with ROE of 12% and growth of 3%. (Risk-free rate andmarket;risk premium will remain the;same.) Using this information, determine the per-share value for the;company.;2. The Gossman;Guitar Company is trying to determine the current value its equity. As of its;last;financialstatements, it had net income of $2,500, with;after-tax cash earnings of $120. The book value of its equity was;$10,500 with cash value of $3,500. The CAPEX was $2,500;depreciation was;$1,250, change in working capital was $500, and the cash flow from net debt;was $750. You may;assume a risk-free rate of 3%, a beta of 1.4 and a risk premium of 5%. After;a 5-year high;growth period, the stable growth will be 2%, but the cost of equity will remain;the;same. Given this;information, what is the equity value of the operating cash flows?;3. The Kentucky;Headhunter Bourbon Company has an operating income (EBIT) of $250 with a;marginal tax rate;of 30%. The net CAPEX was $50 with a $25 change in working capital. Over;the next 5 years;they anticipate an average reinvestment rate of 35% with a return on capital of;22%. During this;high-growth period, they estimate a beta of 0.85, a risk-free rate of 3% and;risk;premium of 4%.;Pre-tax debt cost is 5.5%, with a 20% debt ratio. After year 5, the estimated;beta will be 1.00;with the same risk-free rate andmarket;risk premium as in the high-growth;period. The stable;pre-tax debt cost will be 4.0%, the tax rate will remain at 30% and the stable;growth rate will be;3%. The schedule for Net CAPEX over the 5-year high-growth period is: $55;$60, $65, $50, $40.;The schedule for Change in Net Working Capital will be: $30, $35, $40;$30, $20. For the;stable period, the FCFF can be estimated using the after-tax EBIT less;projected;reinvestment. Based on this information, what is the projected enterprise value;for the;company?;4. The Garcia;Photography Studios is trying to estimate their equity multiples based on the;following;information: High-growth period = 4 years, net income of $45 on sales of $350;with;book value of;equity of $125. During the high-growth period, the payout ratio will be 10%, and;the firm?s beta of;1.10, risk-free rate of 3% andmarket;risk premium of 5% will remain constant.;After the 4-year;high-growth period, the growth rate in earnings will drop to 4%.;a) Using this;information, determine the company?s P/E, PEG, Price to Book Value and Price to;Sales ratios.;b) What would be;the P/E ratio if the high-growth period ended up being 5 years and the stable;growth rate was 5%?;5. The Thibodeaux;Crawfish Company wants to determine its value multiple. They are;estimating a 3 year;high-growth period with a starting sales level of $1,250, EBIT of $500;depreciation of;$75, tax rate of 35%, and capitalinvested;of $700. During the high-growth;period, the firm;will have a reinvestment rate of 65% and a cost of capital of 9.0%. After the;high-growth period;the growth rate will be 3%.;a) Using this;information, determine the enterprise value for the company, as well as;EV/EBITDA, EV/Cap investment and EV/Sales.;b) What would the;impact to the valuations if the tax rate were 40% and the reinvestment rate;during the;high-growth period was 70%?

Paper#48955 | Written in 18-Jul-2015

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