exercises on discounted cash flow valuation...

3

Click here to load reader

Upload: lamngoc

Post on 17-Jul-2018

212 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Exercises on Discounted Cash Flow Valuation (I)homepage.univie.ac.at/youchang.wu/ExerciseSheet1.pdf · Exercises on Discounted Cash Flow Valuation (I) 1. Calculate the Free Cash Flow,

Exercises on Discounted Cash Flow Valuation (I)

1. Calculate the Free Cash Flow, and the Free Cash Flow to equity holders using the following data (all amounts are in EUR 1000):

EBIT 2400Depreciation 700 Investment 900 Tax paid 570 Payments to debt holders: Interest 120 Repayment 250

2. The table below gives information about firm XYZ in year 2005.

Assets Liabilities Operating cash 10 Short term debt 400 Marketable securities 100 Accounts payable 300 Inventories 490 Long term debt 500 Accounts receivable 220 Shareholders’ equity 500 Other current assets 180 Net property, plant, equipment 700 Total Assets 1700 Total Liabilities 1700

Income statement Revenues 1800 Non operating income (dividends and interest) 10 Cost of goods sold 1000 General and admin. Expense 300 Depreciation expense 150 Interest expense 70 Income tax (actually paid) 116 Net income 174

Other information Net investment 120 WACC 12%Tax Rate 40%

(1) Using this data, generate NOPLAT, Free Cash Flow, Free Cash Flow to equity-holder

statements, and calculate Invested Capital, Working Capital, ROIC (return on invested capital) and reinvestment rate.

(2) Forecast the free cash flows of firm XYZ for the years 2006-2008, assuming that ROIC

and investment rate in those years are the same as in 2005.

Page 2: Exercises on Discounted Cash Flow Valuation (I)homepage.univie.ac.at/youchang.wu/ExerciseSheet1.pdf · Exercises on Discounted Cash Flow Valuation (I) 1. Calculate the Free Cash Flow,

(3) Suppose that reinvestment rate and return on existing invested capital of firm XYZ remains the same as in 2005, but the return on new invested capital is 12.5%. What would be your forecast free cash flows for the years 2006-2008?

(4) Suppose that from year 2006 onward, return on invested capital will be 12.5% and reinvestment rate will be 20%. What would be your forecast free cash flows for the years 2006-2008?

(5) Maintain the assumption you make in (4), further assume that at the end of year 2008, the residual value of the firm is 1200. What is your estimation of company value at the end of 2005?

4. The NOPLAT of Firm Growth in year 2006 is 1000. It is estimated that next year return on existing capital will remain unchanged, and return on new invested capital will be 20%, and the firm will have a growth rate of 6% in NOPLAT. What is your estimate of Firm Growth’s FCF in 2006?

5. Heineken, a beer producer, has an average capital turnover rate of 1.8 over the last few years.

Suppose that beer industry has an average operating margin (or profit margin) of 13.5% and that the firm faces a marginal income tax of 40%. What would be your forecast of Heineken’s ROIC?

6. The following information about Firm A and B is given:

Firm A Firm B NOPLAT in the current year 1000 1000 Expected NOPLAT growth rate (forever) 5% 5% Return on invested capital 15% 20% WACC 10% 10%

Value these two companies separately at the beginning of the current year. What accounts for the difference in the firm value?

7. True or False? Explain your answer.

(a) Other things equal, as the expected growth rate in cash flows increases, the value of an asset increases.

(c) Other things equal, as the explicit FCF forecast period becomes longer, the value of an asset increases.

(d) Other things equal, as the uncertainty about the expected cash flows increases, the value of an asset increases.

(e) An asset with an infinite life (i.e., it is expected to last forever) will have an infinite value.

(f) The FCF valuation model tends to under value firms with a high leverage ratio since debt tax shields are not recognized when calculating the FCFs.

8. Problems in DCF Valuation. Why might discounted cash flow valuation be difficult to do for the following types of firms?

(a) A private firm, where the owner is planning to sell the firm.

Page 3: Exercises on Discounted Cash Flow Valuation (I)homepage.univie.ac.at/youchang.wu/ExerciseSheet1.pdf · Exercises on Discounted Cash Flow Valuation (I) 1. Calculate the Free Cash Flow,

(b) A biotechnology firm, with no current products or sales, but with several promising product patents in the pipeline.

(c) A cyclical firm, during a recession.

(d) A troubled firm, which has made significant losses and is not expected to get out of trouble for a few years.

(e) A firm, which is in the process of restructuring, where it is selling some of its assets and changing its financial mix.

(f) A firm owning a lot of valuable land that is currently unutilized.