ECOM105 Valuation Main Examination Period 2019
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Main Examination Period 2019
ECOM105 Valuation
Question 1
An investor is valuating the company VECTOR. In 2018, the company had sales and EBIT of €80000 and €9000, respectively. The investor's estimates for future sales and net financial expenses of the company are reported in Table 1.
Table 1
|
Year 2019 |
Year 2020 |
Year 2021 |
Year 2022 |
Year 2023 |
Sales |
€88250 |
€91300 |
€93250 |
€97000 |
€102000 |
Net financial expenses |
€6400 |
€7100 |
€7850 |
€8100 |
€8800 |
The investor makes the additional assumptions:
EBIT margin (% sales): increase of 35 basis points (0.35%) per year until 2021, included, and decrease of 50 basis points (0.5%) per year in 2022 and 2023.
Depreciations: 5% of sales, all years.
Recurrent Capital Expenditure: 7% of sales for 2019 with percentage decreasing 55 basis points (0.55%) per year until 2022.
Change in working capital: 10% of yearly change of sales.
Tax rate: 20%.
Expected rate of return on assets (RA): 10%.
To answer the following questions make plausible assumptions if necessary.
a) Compute the yearly Capital Cash Flows (CCF) for the period from 2019 until 2023. Explain your answer.
b) Assume the expected nominal growth rate of CCF in perpetuity is 1.25%. What is the expected terminal value of this company? Explain your answer.
c) What is the expected enterprise value of VECTOR at the end of the year 2019? Explain your answer.
d) “The family of discounted cash-flow models includes different types of models that differ in their assumptions.” Is this statement true or false? Explain your answer.
[10 marks]
Question 2
Consider the information in Table 2 about an investment opportunity that can be deferred for one year:
Table 2
Expected cash flow (CF) year 1 |
€50 million |
g – perpetuity growth rate of CF |
1.75% |
k – cost of capital |
12% |
K – investment cost |
€500 million |
σ – standard deviation of CF |
14% |
r – risk-free rate |
3% |
δ – opportunity cost |
7% |
a) What is the “static” Net Present Value (NPV) of this investment opportunity? Explain your answer and present the result rounded to one decimal place (example 1.55 to 1.6).
[5 marks]
b) What is the value of this investment opportunity using the Black–Scholes (B–S) formula for an European call option? Explain your answer. For your computations, use as inputs for the cumulative probability from the normal distribution N(d1) = 0.3475 and N(d2) = 0.2973. Present your result rounded to one decimal place.
[10 marks]
c) Should this investment opportunity be accepted or not? Explain your answer.
[5 marks]
Question 3
Consider the following information in Table 3 about two companies, SUNIX and STARIX:
Table 3
|
SUNIX |
STARIX |
Enterprise value (€) |
54000 |
43000 |
Debt (€) |
17000 |
12000 |
Cash (€) |
6000 |
5000 |
Minority Interests (€) |
400 |
700 |
Financial Investments (€) |
4000 |
1250 |
Number of shares |
2500 |
3000 |
EPS 2019 (€) |
3.5 |
6.0 |
EPS 2020 (€) |
4.0 |
6.3 |
where EPS 2019 and EPS 2020 stands for expected earnings per share for the year 2019 and 2020, respectively. For all your answers present results with one decimal (for example, 1.45 is rounded to 1.5).
a) What is the total equity value and the equity value per share of each company? Explain your answer.
[5 marks]
b) The market prices per share of company SUNIX and STARIX are €15 and €14, respectively. What is your investment recommendation based on the fundamental valuation done in Question 3a? Explain your answer.
[5 marks]
c) Using market prices of each company, what is the multiple Price Earnings for 2019 and 2020 (PE 2019 and PE 2020) for each company? Explain your answer.
[5 marks]
d) Assume that nominal growth rates (g) of dividends of company SUNIX and STARIX are 4% and 0.8%, respectively. What is the 2019 and 2020 Price earnings expected growth (PEG) ratio for each company? Explain your answer.
[5 marks]
e) Considering information from Questions 3c and 3d what can you conclude about the relative valuation of companies SUNIX and STARIX? Explain your answer.
[5 marks]
f) Is your investment recommendation based on the relative valuation in line with the one based on the fundamental valuation done in Question 3b? Explain your answer.
[5 marks]
Question 4
The company ‘ZAG’ has decided to acquire the company ‘BER’. The board of directors of the company ‘ZAG’ decided to finance the deal entirely with the issuance of new equity shares to be offered to the current shareholders of company ‘BER’. How should the number of new issued shares of company ‘ZAG’ be calculated? Explain your answer.
[10 marks]
2021-12-15