Assignment vos

Transcript of Assignment vos

DCF Valuation_Q.1Inputs

Book value of debt 3068Market value of debt 3200No of shares 62price per share 64market value of equity 3968Tax rate 0.4Beta 1.1Risk Free rate 7.0%Market risk premium 6.0%Growth rate (1) 9.5%Stable growth rate 4.0%

Calculation of WACC (growth )Cost of debt 8.00%Cost of equity 13.60%proportion of debt 0.45proportion of equity 0.55WACC 9.67%

Calculation of WACC in stable periodCost of debt 7.50%cost of equity 13.60%propotion of debt 0.33proportion of equity 0.67WACC 10.57%

1993 1994Revenues 13500.00 14782.50EBITDA 1290.00 1412.55Depreciation 400.00 438.00EBIT 890.00 974.55EBIT(1-t) 534.00 584.73Depreciation 400.00 438.00Capex 450.00 492.75WC 945.00 1034.78Change in WC 89.77FCFF 440.20

440.20PV 401.39Value of the firm 8317.97Value of equity 5117.97Value of equity per share 82.55

Here, given Market Price = Rs. 64 whereas the Intrinsic Value = Rs. 82.55. Therefore, the share price is undervalued and is recommended to BUY.

1995 1996 1997 199816186.84 17724.59 19408.42 21252.221546.74 1693.68 1854.58 2030.77479.61 525.17 575.06 629.70

1067.13 1168.51 1279.52 1401.07640.28 701.11 767.71 840.64479.61 525.17 575.06 629.70451.00 493.84 452.00 494.94

1133.08 1240.72 1358.59 1487.6698.30 107.64 117.87 129.07

482.02 527.82 577.96 632.8710023.05

482.02 527.82 577.96 10655.91400.76 400.13 399.51 6716.19

DCF Valuation_Q.2InputsBeta 1.15Debt/(Debt+Equity) 20% Health DivisionCost of Debt 7.50%Tax rate 40%

7%Market Risk Premium 5.5% Assuming

A. Calculation for WACC (Health Division)Cost of Equity 13.33%Cost of Debt 4.50%Proportion of Debt 0.2Proportion of Equity 0.8Tax Rate 40%WACC 11.56%

B. Calculation Of Valuation of the DivisionGrowth Rate 6% Stable Growth Rate

1993 1994 1995 1996Revenue 5285 5602.10 5938.23 6294.52EBIT 560 593.60 629.22 666.97EBIT(1-T) 336 356.16 377.53 400.18Capex 420 436.80 454.27 472.44Depriciation 350 364.00 378.56 393.70

FCFF 266 283 302 321

FCFF 283 302 321

PV 254.00 242.51 231.51

Value Of the Division 4062

T-Bond Rate (Rf)

4%

1997 19986672.19 7072.52706.99 749.41424.19 449.64491.34 510.99409.45 425.83

342 3645014

342 5378

220.99 3112.54

DCF Valuation_Q.3InputsEPS 0.85Revenue per share 12.5Working Capital 40% of Revenue 40%WC 5Growth Rate 20%Declining Growth Rate 5%Beta 1.1Risk Free rate 7%Market Risk Premium 6%Debt Ratio 15%Equity Ratio 85%Cost of Debt 7.5% Assuming

WACC CalculationCost of Debt 7.5%Proportion of Debt 0.15Tax Rate 40%Cost of Equity 13.05%Proportion of Equity 0.85WACC 11.77%

A. Calculation of FCFEGrowth Rate 20% Decline Rate

1993 1994 1995Revenue 12.50 15.00 18.00Earning 0.85 1.02 1.22Working Capital 5.00 6.00 7.20Change in WC 1.00 1.20

Working capital*(1-Debt Ratio) 0.85 1.02

FCFE 0.17 0.20

PV 0.15 0.16

Value Per Share 13.14

B.

C. Sensitivity Analysis of valuation with Working Capital change

There might be potential for synergy, with an acquirer with related businesses. The health division at Kodak might also be mismanaged, thereby creating the potential for additional value from better management.

Debt Ratio 0.15Decline Rate 5% 15% 10% 5%

1996 1997 1998 1999 2000 200121.60 25.92 31.10 35.77 39.35 41.311.47 1.76 2.12 2.43 2.68 2.818.64 10.37 12.44 14.31 15.74 16.531.44 1.73 2.07 1.87 1.43 0.79

1.22 1.47 1.76 1.59 1.22 0.67

0.24 0.29 0.35 0.85 1.46 2.1427.92

0.17 0.18 0.19 0.41 0.62 11.27

Using Data Table

Valuation40% 13.14110% 15.959

There might be potential for synergy, with an acquirer with related businesses. The health division at Kodak might also be mismanaged, thereby creating the potential for

WC as a % of Revenue

20% 13.67230% 11.38535% 10.24140% 9.09745% 7.95450% 6.81060% 4.52370% 2.23685% -1.19590% -2.339

DCF Valuation_Q.4InputsEPS 0.56Revenue per share 2.91Capex 13%Depriciation 8%Working Capital 60% of revenue 0.60WC 1.746

Calculation of WACC at Growth stageDebt 0.100Equity 0.900Beta 1.45T-Bond rate 7.00%Market Risk Premium 6.00% AssumingInterest rate 7.50% AssumingTax Rate 40.00%Cost of Equity 15.70%Cost of Debt 7.50%WACC 14.58%

Calculation of WACC at Stable stageBeta 1.10Equity 0.90Debt 0.10T-Bond Rate 7.00%Market Risk Premium 6.00%Interest rate 7.50% Tax rate 40.00%Cost Of Equity 13.60%Cost of Debt 7.50%WACC 12.69%

Growth Rate EstimationGrowth rate from 1994-1998 17.00%Growth Rate From 1998 to 2003 2.40%

Growth Rates 1999 2000 200114.60% 12.20% 9.80%

WC Rate CalculationWC 60% From 1994-1998Rate from 1998-2003 6%

WC as a % of Revenue 1999 2000 200154% 48% 42%

A. Calculation of FCFE1993 1994 1995

Revenue 2.91 3.40 3.98EPS 0.56 0.66 0.77Capex 0.13 0.15 0.18Depriciation 0.08 0.09 0.11Working Capital 1.75 2.04 2.39Change in WC 0.30 0.35

FCFE 0.34 0.40

PV 0.30 0.30

Value Per Share 3.66

Note Capital Expenditure and Depriciation offsets each other in tha stable stage.So they are not taken into account in FCFE for 2003.

B. Working Capital stays 60% of Revenue forever 0.6

Discount Rate 0.1458Calculation for Working Capital

1993 1994 1995Revenue 2.91 3.4047 3.983499EPS 0.56 0.6552 0.766584Capex 0.13 0.1521 0.177957Depriciation 0.08 0.0936 0.109512Working Capital 1.746 2.04282 2.390099Change in working Capital 0.29682 0.347279

FCFE 0.344772 0.403383

FCFF 0.344772 0.403383

PV 0.297988 0.301336

Valuation Per Share 10.95546

C. Beta remains 1.45 forever

If the beta remains 1.45, then the discount rate would be the cost of equity at beta 1.45 i.e,15.70%Cost of Equity 0.157

1994 1995 1996FCFE 0.344772 0.403383 0.471958

FCFE 0.344772 0.403383 0.471958

PV 0.297988 0.301336 0.304722

Valuation Per Share 3.493451

(Remains same from 1994 to 1998)

Growth rate after 2003 onwards 5%

2002 20037.40% 5.00%

30% from 2003 onwards

2002 200336% 30%

1996 1997 1998 1999 2000 2001 2002 2003

4.66 5.45 6.38 7.31 8.20 9.01 9.67 10.160.90 1.05 1.23 1.05 0.92 0.83 0.77 0.730.21 0.24 0.29 0.24 0.21 0.19 0.18 0.170.13 0.15 0.18 0.15 0.13 0.12 0.11 0.102.80 3.27 3.83 3.95 3.94 3.78 3.48 3.050.41 0.48 0.56 0.12 -0.01 -0.15 -0.30 -0.44

0.47 0.55 0.65 0.87 0.87 0.91 0.99 0.303.60

0.47 0.55 0.65 0.87 0.87 0.91 0.99 3.90

0.30 0.31 0.31 0.36 0.31 0.28 0.27 0.91

Capital Expenditure and Depriciation offsets each other in tha stable stage.So they are not taken into account in FCFE for 2003.

1996 1997 1998 1999 2000 2001 2002 20034.660694 5.453012 6.3800237839 7.311507 9.4902479476 12.35 16.11332 21.078570.896903 1.049377 1.2277709 1.227771 0.8619100281 0.602185 0.418686 0.289670.20821 0.243605 0.2850182446 0.285018 0.2000862565 0.139793 0.097195 0.067245

0.128129 0.149911 0.1753958429 0.175396 0.123130004 0.086026 0.059812 0.0413812.796416 3.271807 3.8280142703 4.386904 5.6941487686 7.410001 9.667991 12.647140.406317 0.475391 0.5562072017 0.55889 1.3072444148 1.715852 2.257989 2.97915

0.471958 0.552191 0.6460638412 0.643649 -0.371557572 -0.981869 -1.641167 3.2688239.91001

0.471958 0.552191 0.6460638412 0.643649 -0.371557572 -0.981869 -1.641167 43.17883

0.304722 0.308146 0.3116080298 0.268318 -0.1338728791 -0.305764 -0.441726 10.04471

If the beta remains 1.45, then the discount rate would be the cost of equity at beta 1.45 i.e,15.70%

1997 1998 1999 2000 2001 2002 20030.552191 0.646064 0.8710596923 0.869248 0.9146132338 0.988566 0.30

2.896370.552191 0.646064 0.8710596923 0.869248 0.9146132338 0.988566 3.191524

0.308146 0.311608 0.3631179884 0.313192 0.2848200835 0.266076 0.742445

Global Drug WorldInputsNet Income 164497Interest 25488Tax Rate 0.3Non cash Expense 56293Fixed Expenses 143579Change in WC 7325Net Borrowing 27409

1 Calculation of FCFF for 2005FCFF Net income+Int(1-T)+NCC-FC-Inc in WCFCFF 95374

2 Calculation of FCFE for 2005FCFE FCFF-Net Debt paymentFCFE 67965

3 Calculation of Sustainable growth rate

Sustainable growth rate Plowback ratio*Return on Equity

Plowback ratio(b) [Net Income-(Dividend per share*shares outstanding)]/Net IncomeROE Net Income/Beginning of the year equity

InputsDividend 82248.8 (Dividend per share*shares outstanding)Total Equity 1019869

Sustainable growth rate 0.080646

4 InputsFor 2005Net Income 164497 Interest on Long term debt 20265Other interest 5223Total Interest 25488Tax rate 30%Interest (1-Tax) 17841.6Depreciation 56293Capex 143579

Working Capital change 7325Net Borrowings 27409FCFF for 2005 87727.6

FCFE for 2005 42477

5 InputsPer Share FCFF 0.19G1 8%Stable Growth 5%Return on Equity 10%WACC 7.5%Tax rate 30%

per share FCFF

FCFEPV

Value

Net income+Int(1-T)+NCC-FC-Inc in WC

Plowback ratio*Return on Equity

[Net Income-(Dividend per share*shares outstanding)]/Net IncomeNet Income/Beginning of the year equity

(Dividend per share*shares outstanding)

Sales Growth 6%For 2006 2005 2006 varianceSales 4052173 4295303 243130Expenses 3735397 3735397Non cash Charges 56293 60000Interest on long term Debt 20265 20265Other interest 5223 5223Income before income taxes 234995 474418Less: Income tax 70499 142326Net Income 164497 332093

Additional fixed capital 36470Additional Working capital 24313

FCFF for 2006 349152

2005 2006 2007 20080.19 0.21 0.22

4.6540.21 4.876

0.187 4.029

4.216

MWC Inc.Growth EPS

Dividends 23920 G1 0.15 DEPDPS 2.3 G- Stable 0.08 FINo of shares 10400 NWC

Net debt proceedsCost of equity 13% FCFE

A. Calculation as per two-stage Dividend Discount model

2005 2006 2007 2008DPS 2.3 2.64 3.04 3.29

65.702.64 68.74

PV 2.34 53.84Value of share 56.18

B. Calculation as per two-stage FCFE approach

2005 2006 2007 2008FCFE 2.42 2.78 3.20 3.46

69.112.78 72.31

PV 2.46 56.63Value per share 59.09

2.8810.8081.1540.4230.3082.419

Telluride & Subsidiaries_Q.23A. Growth GrowthG1 0.27 Common sharesG- Stable 0.13 Ke

RevenueNet incomeDepreciationChg in WCFCInvFCFE

Growth RateEarning per shareDepreciationWorking capitalFCInvFCFETerminal valueTotal cash flow to equityPVcurrent value per share

B. Tax rate 30%Growth 32% 13%

Earning per share 0.952Dividend per share 0.286Earning 1 1.257Dividend 1 0.377Earning 2 1.659Dividend 2 0.498Earning 3 1.874Dividend 3 0.562

Years 0 1Current value of a share (Vo) 0.331 0.383

Vo

Net income 80Depreciation 23

Working capital 41FCInv 38FCFE 24 million

Telluride & Subsidiaries_Q.230.13

840.14

2000 2001 2002 2003598 759.46 964.51 1089.9080 101.60 129.03 145.8123 29.21 37.10 41.9241 52.07 66.13 74.7338 48.26 61.29 69.2624 30.48 38.71 43.74

0.27 0.27 0.130.952 1.210 1.536 1.7360.274 0.348 0.442 0.4990.488 0.620 0.787 0.8900.452 0.575 0.730 0.8240.286 0.363 0.461 0.521

52.074Total cash flow to equity 0.363 52.534

0.318 40.424current value per share 40.742

Common shares 84 millionKe 14.0%

256.23243.269

43.982

Sundanci_Q.24A. ii Calculation of ROE for the year 2000

Net IncomeBeginning of the year equity

ROEROE

iii. Calculation of Sustainable rate of growth

Sustainable growth rate

b

Dividend per shareShare outstanding

Sustainable growth rateSustainable growth rate

B. a) An increase in in the quarterly dividend to 0 .15 per share

Quarterly dividend increases by 0.15 per shareSo, yearly increase in dividend per share is 0.15*4=0.6So, now the dividend per share is

b) Bond Issue of 25$ million, the proceeds of which would be used to increase production capacity

Issue of bond has nothing to do with sustainable growth rate. The proceeds of issue of bond increases the production which in turn increases the value of the firm in terms of growth in share price. But it has no direct relation with sustainable growth rate.

c) A 2-for-1 stock split

2-for -1 stock split indicates that the no.of outstanding shares increases by 2 times whereas the price per share decreases by half.

Now, the no. of outstanding sharesNow, the no. of outstanding shares

Both the no.of shares outstanding and increase in dividend has a direct impact on the sustainable growth rate.But the increase in the quarterly dividend has more impact on the growth rate.In both the cases the growth rate has decreased.

1st Case

2nd Case

C.

i. The DDM uses a strict definition of cash flow to equity, i.e. the expected dividends on the common stock. In fact, taken to its extreme, the DDM cannot be used to estimate the value of a stock that pays no dividends. The FCFE model expands the definition of cash flows to include the balance of residual cash flows after all financial obligations are met. Thus, the FCFE model explicitly recognizes the firm's investment and financing policies as well as its dividend policy. In instances of a change of corporate control and thereafter the possibility of changing dividend policy, the FCFE model provides a better estimate of value. The DDM is biased toward finding low P/E ratio stocks with high dividend yields to be undervalued. It is considered a conservative model in that it tends to identify fewer undervalued firms as market prices rise relative to fundamentals. The DDM does not allow for the potential tax disadvantage of high dividends relative to the capital gains achievable from retention of earnings.

ii. Both two-stage valuation model allow for two distinct phases of growth, initial finite period where the growth rate is abnormal, followed by a stable growt period that is expected to last indefinitely. These two-stage models share the same limitations with respect to the growth assumptions. 1) There, is a dufficulty of defining the duration of the extraordinary growth period. Eg: A longer period of high growth will lead to a higher valuation and there is a temptation to assume an unrealistically long period of extraordinary growth. 2) The assumption of a sudden shift from high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

80674

Net Income/Beginning of the year Equity0.118694

Plowback ratio* Return on equityb*ROE

[Net Income-(Dividend per share*share outstandind)]/Net Income

0.28684

b*ROE0.08305

0.6+0.286 0.886

0.008273

Bond Issue of 25$ million, the proceeds of which would be used to increase production capacity

Issue of bond has nothing to do with sustainable growth rate. The proceeds of issue of bond increases the production which in turn increases the value of the firm in terms of growth in share price. But it has no direct relation with sustainable growth rate.

2-for -1 stock split indicates that the no.of outstanding shares increases by 2 times whereas the price per share decreases by half.

84*2168

0.047407

Both the no.of shares outstanding and increase in dividend has a direct impact on the sustainable growth rate.But the increase in the quarterly dividend has more impact on the growth rate.

But the decrease is more in the 1st case, i.e in the increase in dividend.

Change in growth rate90.04%

Change in growth rate42.92%

The DDM uses a strict definition of cash flow to equity, i.e. the expected dividends on the common stock. In fact, taken to its extreme, the DDM cannot be used to estimate the value of a stock that pays no dividends. The FCFE model expands the definition of cash flows to include the balance of residual cash flows after all financial obligations are met. Thus, the FCFE model explicitly recognizes the firm's investment and financing policies as well as its dividend policy. In instances of a change of corporate control and thereafter the possibility of changing dividend policy, the FCFE model provides a better estimate of value. The DDM is biased toward finding low P/E ratio stocks with high dividend yields to be undervalued. It is considered a conservative model in that it tends to identify fewer undervalued firms as market prices rise relative to fundamentals. The DDM does not allow for the potential tax disadvantage of high dividends relative to the capital gains achievable from retention of earnings.

Both two-stage valuation model allow for two distinct phases of growth, initial finite period where the growth rate is abnormal, followed by a stable growt period that is expected to last indefinitely. These two-stage models share the same limitations with respect to the growth assumptions. 1) There, is a dufficulty of defining the duration of the extraordinary growth period. Eg: A longer period of high growth will lead to a higher valuation and there is a temptation to assume an unrealistically long period of extraordinary growth. 2) The assumption of a sudden shift from high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

But the decrease is more in the 1st case, i.e in the increase in dividend.

There, is a dufficulty of defining the duration of the extraordinary growth period. Eg: A longer period of high growth will lead to a higher valuation and there is a temptation to assume an unrealistically long period of extraordinary growth. 2) The assumption of a sudden shift from high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

There, is a dufficulty of defining the duration of the extraordinary growth period. Eg: A longer period of high growth will lead to a higher valuation and there is a temptation to assume an unrealistically long period of extraordinary growth. 2) The assumption of a sudden shift from high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

The assumption of a sudden shift from high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

Because the value is quite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing assets that do not generate any cash flows.

Sundanci_Q.25A. The formula for calculating a price earnings ratio (P/E) for a stable growth firm is the dividend payout ratio divided by the difference between the required rate of return and the growth rate of dividends. If the P/E is calculated based on trailing earnings (year 0), the payout ratio is increased by the growth rate. If the P/E is calculated based on next year’s earnings (year 1), the numerator is the payout ratio.

P/E on trailing earnings

P/E =

Growth 13%Payout 30%Cost of Equity 14%

P/E Ratio 33.9

P/E on next year's earnings

P/E Ratio 30.0

B.The P/E Ratio is a decreasing function of riskiness. As risk increases, the P/E ratio decreases. Increases in the riskiness of Sundanci stock would be expected to lower the P/E. The P/E Ratio is an increasing function of growth rate of the firm, thus higher the P/E ratio. Sundanci would command a higher P/E if analysts increases the expected growth rate. The P/E ratio is a decreasing function of the market premium. An increased market risk premium increases the required rate of return, lowering the price of a stock relative to its earnings. A higher risk premium would be expected to lower Sundanci's P/E ratio.

[payout ratio ´ (1 + g)]/(r - g)

The formula for calculating a price earnings ratio (P/E) for a stable growth firm is the dividend payout ratio divided by the difference between the required rate of return and the growth rate of dividends. If the P/E is calculated based on trailing earnings (year 0), the payout ratio is increased by the growth rate. If the P/E is calculated based on next year’s earnings (year 1), the numerator is the payout ratio.

The P/E Ratio is a decreasing function of riskiness. As risk increases, the P/E ratio decreases. Increases in the riskiness of Sundanci stock would be expected to lower the P/E. The P/E Ratio is an increasing function of growth rate of the firm, thus higher the P/E ratio. Sundanci would command a higher P/E if analysts increases the expected growth rate. The P/E ratio is a decreasing function of the market premium. An increased market risk premium increases the required rate of return, lowering the price of a stock relative to its earnings. A higher risk premium would be expected to lower Sundanci's P/E ratio.

Jones Group Inc.Calculation of FCFF of Jones Group Inc. & D.Com Corp.

Q.1 WACC 0.17A. Tax Rate 0.3

2000 2001 2002 2003EBIT 304.55 251.23 267.98 308.02Depr & Amor 504 654 751 849Capex 1000 650 650Change in WC -3.92 -15.16 -18.41EBIT(1-T) 175.861 187.586 215.614

FCFF -166.219 303.746 433.024

FCFF -166.219 303.746 25331.9PV in 2000 -142.0675 221.8906 15816.49

Value 15896.32

D.Com Corp.

A. WACC 0.17Tax Rate 0.3

2000 2001 2002 2003EBIT 29.45 69.68 47.51 10.52Depr & Amor 69 129 136 144Capex 400 50 50Change in WC 5.19 -4.32 -6.47EBIT(1-T) 48.776 33.257 7.364

FCFF -227.414 123.577 107.834

FCFF -227.414 123.577 6308.289PV in 2000 -194.3709 90.27467 3938.71

Value 3834.614

B.