Question

1. Assume that you are an equity analyst and you have been asked
to generate a twelve month forward price target for ShopSmart Plc,
a retail company. You decide to use the discounted Free Cash Flow
to Firm (FCFF) valuation model. For the year just ended you have
collected the following information on ShopSmart PLC:

? Net Income: £260 m

? Sales: £2,600 m

? Depreciation: £100 m

? Investment in fixed capital: £180 m

? Interest expense: £110 m

? The working capital has increased from £55m at the beginning of
the year to £95m at the year-end

? Effective tax rate: 30%

? Current market value of the outstanding debt: £1,800 m

? Number of shares outstanding: 10 m

? Current P/E (price-to-earnings): 25

? The company’s target capital structure is 30% debt, and 70%
equity.

? Before-tax cost of debt: 6%

? Risk free rate: 5%

? Market risk premium: 5%

? The stock’s beta: 1.3

You forecast that the FCFF and Net Income will grow at 7% per annum
over the next three years. Due to uncertainty beyond this
three-year forecast horizon, you decide to estimate the terminal
value (at the forecast horizon) by using the sector’s
historic-average EV/Sales (Enterprise Value-to-Sales) multiple of
4. You also forecast that future years’ net profit margin will
remain constant, and will be equal to the margin of the year just
ended.

Reminder of the FCFF formula:

FCFF = Net Income + Net Noncash Charges + Interest Expense x (1-
tax rate) – Fixed Capital Investment – Working Capital
Investment

Required:

Generate the twelve month forward price target for ShopSmart Plc using the FCFF valuation approach, and state and justify your investment recommendation for the stock. Please show your workings.

2. You are a buy-side analyst and your fund manager has asked
you to estimate the value of EcoShop Plc, a listed retail company.
You have collected the following data on EcoShop Plc, for the year
just ended:

? Earnings per share (EPS): £26

? Number of shares outstanding: 10m

? Depreciation: £80m

? Investment in fixed capital: £110m

? Interest expense: £50m

? The working capital has increased from £30m at the beginning of
the year to £40m at the year-end

? Effective tax rate: 20%

? Current market value of the outstanding debt: £1,400m

? The company’s target capital structure is 20% debt, and 80%
equity

? Before-tax cost of debt: 4%

? The current yield on the 10 year UK Government bond is 2%

? Market risk premium: 5%

? The stock’s beta: 1.3

You estimate that the Free Cash Flow to the Firm (FCFF) will be
growing at 6% per annum over the next three years. However, because
it is too difficult to estimate the growth rate beyond this
forecast horizon, you decide to determine the terminal value
element of the valuation model by using the sector’s
historic-average EV/FCFF (Enterprise Value-to-FCFF) multiple of 15.
EcoShop’s current EV/FCFF multiple is 13.

Reminder of the FCFF formula:

FCFF = Net Income + Net Noncash Charges + Interest Expense x (1-
tax rate) – Fixed Capital Investment – Working Capital
Investment

Required:

Compute the fundamental value of EcoShop’s stock using the FCFF
valuation model. State and justify your investment recommendation.
Please show your workings.

3. A portfolio manager has recently taken a long position in XYZ
Plc’s stocks, and wants to know whether this stock is still worth
holding. She requests a sell-side analyst to provide an estimate of
the stock’s twelve month forward price target. The analyst decides
to use the Free Cash Flow to the Firm (FCFF) valuation model, and
collects the following information for the year just ended:

? Earnings: £130m

? Sales: £1,300m

? Depreciation: £50m

? Investment in fixed capital: £90m

? Interest expense: £55m

? The working capital has increased from £35m at the beginning of
the year to £55m at the year-end

? Effective tax rate: 20%

? Current market value of the outstanding debt: £900m

? Number of shares outstanding: 10m

? The company’s target capital structure is 35% debt and 65%
equity.

? Before-tax cost of debt: 6%

? Risk free rate: 4.5%

? Market risk premium: 7%

? The stock’s beta: 1

? The stock’s current P/E (price-to-earnings) multiple is 18

The analyst forecasts that the FCFF and Sales will grow at 8% per
annum over the next three years. Due to uncertainty beyond this
three-year forecast horizon, the analyst decides to estimate the
terminal value (at the forecast horizon) by using the sector’s
historic-average EV/Sales (Enterprise Value-to-Sales) multiple of
2.

Reminder of the FCFF formula:

FCFF = Net Income + Net Noncash Charges + Interest Expense x (1-
tax rate) – Fixed Capital Investment – Working Capital
Investment

Required:

Estimate the one year forward target price for this stock using the
FCFF valuation approach, calculate the return that the portfolio
manager would realise by holding the stock over the next twelve
months and then selling it at the projected target price, and
explain whether this represents a worthwhile investment. Please
show your workings.

Answer #1

You are a buy-side analyst and your fund manager has asked you
to estimate the value of EcoShop Plc, a listed retail company. You
have collected the following data on EcoShop Plc, for the year just
ended:
Earnings per share (EPS): £26
Number of shares outstanding: 10m
Depreciation: £80m
Investment in fixed capital: £110m
Interest expense: £50m
The working capital has increased from £30m at the beginning of
the year to £40m at the year-end
Effective tax rate: 20%
Current...

1. A company is projected to generate free cash flows of $159
million next year and $204 million at the end of year 2, after
which it is projected grow at a steady rate in perpetuity. The
company's cost of capital is 9.7%. It has $171 million worth of
debt and $51 million of cash. There are 27 million shares
outstanding. If the exit multiple for this company's free cash
flows (EV/FCFF) is 5.1, what's your estimate of the company's...

You are valuing Soda City Inc. It has $110 million of debt,
$90 million of cash, and 140 million shares outstanding. You
estimate its cost of capital is 12.4%. You forecast that it will
generate revenues of $700 million and $800 million over the next
two years, after which it will grow at a stable rate in perpetuity.
Projected operating profit margin is 20%, and the tax rate is 30%.
Each year, deprecation is $4mm and capital expenditures including
the...

As the newly appointed financial analyst for Coverdale Office
Machines Ltd., you have been asked to evaluate two alternative
capital investment opportunities. The company’s corporate income
tax rate is 24%.
First, you must re-calculate the company’s cost of capital. The
company recently paid its annual dividend of $2.75 per common
share. According to your calculations, the company’s beta is 0.80.
The company’s common shares currently trade for $25.80 each on the
TSX. The market return is estimated at 16% and...

Icarus Airlines is proposing to go public, and you have been
given the task of estimating the value of its equity. Management
plans to maintain debt at 39% of the company’s present value, and
you believe that at this capital structure the company’s debt
holders will demand a return of 5% and stockholders will require
12%. The company is forecasting that next year’s operating cash
flow (depreciation plus profit after tax at 21%) will be $77
million and that investment...

You are valuing Soda City Inc. It has $111 million of debt, $86
million of cash, and 161 million shares outstanding. You estimate
its cost of capital is 11.9%. You forecast that it will generate
revenues of $709 million and $791 million over the next two years,
after which it will grow at a stable rate in perpetuity. Projected
operating profit margin is 24%, tax rate is 28%, reinvestment rate
is 29%, and terminal EV/FCFF exit multiple at the end...

You are valuing Soda City Inc. It has $132 million of debt, $77
million of cash, and 182 million shares outstanding. You estimate
its cost of capital is 9.8%. You forecast that it will generate
revenues of $726 million and $774 million over the next two years,
after which it will grow at a stable rate in perpetuity. Projected
operating profit margin is 33%, tax rate is 24%, reinvestment rate
is 46%, and terminal EV/FCFF exit multiple at the end...

You are valuing Soda City Inc. It has $132 million of debt, $77
million of cash, and 182 million shares outstanding. You estimate
its cost of capital is 9.8%. You forecast that it will generate
revenues of $726 million and $774 million over the next two years,
after which it will grow at a stable rate in perpetuity. Projected
operating profit margin is 33%, tax rate is 24%, reinvestment rate
is 46%, and terminal EV/FCFF exit multiple at the end...

Suppose that at June 15, 2018, as a staff financial analyst with
Consulting Advisory Services (CAS) you determine the following
metrics for the upcoming 12-month period for Silva
Corporation, Inc. (SCI):
After-tax operating income (aka, NOPAT) is
forecast to be $400 million.
SCI’s depreciation expense is forecast at $140
million.
SCI’s capital expenditures (aka, CAPEX) is forecast to
be $225 million.
No change is expected in SCI’s net operating working
capital.
SCI’s free cash flow is forecast to grow at...

Icarus Airlines is proposing to go public, and you have been
given the task of estimating the value of its equity. Management
plans to maintain debt at 35% of the company’s present value, and
you believe that at this capital structure the company’s debt
holders will demand a return of 5% and stockholders will require
12%. The company is forecasting that next year’s operating cash
flow (depreciation plus profit after tax at 21%) will be $73
million and that investment...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 27 seconds ago

asked 2 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 13 minutes ago

asked 18 minutes ago

asked 36 minutes ago

asked 39 minutes ago