ECOM118 Practical Valuation 2019
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Main Examination Period 2019
ECOM118 Practical Valuation
Question 1
An equity analyst is valuing the company SPOT, with reference date of year-end 2019. The equity analyst expects the Free Cash Flows to Firm (FCF) to be as shown in Table 1.
Table 1
Year 2019 |
Year 2020 |
Year 2021 |
Year 2022 |
Year 2023 |
Year 2024 |
€8000 |
€8600 |
€9200 |
€9750 |
€10200 |
€10950 |
Additionally, the equity analyst has the following information and further assumptions: (i) risk-free interest rate: 3%; (ii) target capital structure: debt/(debt+equity) ratio of 45%; (iii) expected debt spread: 4%, (iv) reference equity risk premium: 6%; (v) equity beta: 1.90; (vi) tax rate: 20%; and (vii) expected nominal growth of FCF in perpetuity: 2%. The equity analyst is also assuming that at year-end 2019 net debt will be €40000 and financial investments will be €12000. The number of shares of SPOT is 7800 and the current market price of the company is €10.15 per share.
a) Considering the Capital Asset Pricing Model (CAPM) and the target capital structure of SPOT, calculate the appropriate discount rate of the estimated FCF and terminal value. Explain your answer. Present your answer rounded to two decimal places (for example, 10.325% rounded to 10.33%).
b) Can the equity beta be different from the asset beta? Explain your answer.
c) Calculate the Enterprise Value of SPOT at year-end 2019. Explain your answer.
d) Calculate the Equity Value of SPOT at year-end 2019. Considering the current market price of SPOT, what would be your investment recommendation? Explain your answer.
e) A crucial step when valuing a company is to identify its value drivers. What are value drivers and how can you identify them during the valuation process? Explain your answer.
Question 2
An investor is valuing the Company ATR which has the following expected key financial measures for year-end 2019 (Table 2):
Table 2
Enterprise value |
€40000 |
Level of cash |
€7000 |
Level of interesting bearing debt |
€14000 |
Minority interest |
€2500 |
Financial Investments |
€3000 |
Number of equity shares |
4000 |
2019 Book Value Per Share (BVS) |
€5.25 |
Additionally, the investor has collected the following information about a set of comparable listed companies with similar leverage and other relevant fundamentals (Table 3):
Table 3
Company |
Current market price per share (€) |
BVS 2019 (€) |
B |
8.1 |
7.50 |
C |
9.3 |
8.00 |
D |
7.4 |
8.50 |
When solving the following exercises, round your computations to one decimal place (e.g. present 1.56 as 1.6).
a) What is the 2019 price-to-book (PBV) multiple of company ATR implied in the investor’s expectations? Explain your answer.
b) Considering only the information of the 2019 PBV multiple of the set of comparable companies, what is the conclusion about the relative valuation of company ATR? Explain your answer.
c) There are fundamental variables that have an impact on the PBV ratio and should be taken into account when carrying out a relative valuation exercise based on this ratio. Give two examples of such variables, explaining your answer (there is no need for computations).
Question 3
“If the static NPV of an investment project is negative, that project should be rejected.” Do you agree with this statement? Explain your answer.
2022-01-05