ECOM105 Valuation 2020-21
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January Examination Period 2020-21
ECOM105 Valuation
Question 1
An investor is making the valuation of the company CALIPSO. In 2020, the company had sales and EBIT of €85000 and €8500, respectively. The investor's estimates for future sales and net financial expenses of the company are reported in Table 1.
Table 1
|
|
Year 2021 |
Year 2022 |
Year 2023 |
Year 2024 |
Year 2025 |
|
Sales |
€87000 |
€83000 |
€89000 |
€93000 |
€95000 |
|
Net financial expenses |
€6200 |
€6500 |
€6750 |
€7200 |
€7450 |
The investor has the additional assumptions:
EBIT margin (% sales): increase of 45 basis points (0.45%) per year until 2023, included, and decrease of 65 basis points (0.65%) per year in 2024 and 2025. Depreciations: 6% of sales, all years.
Recurrent Capital Expenditure: 7% of sales for 2021 with percentage decreasing 25 basis points (0.25%) per year until 2024.
Change in working capital: 11% of yearly change of sales.
Tax rate: 20%.
Expected rate of return on assets (RA): 9%.
To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g b rather than β, capital_sigma rather than ∑).
a. Compute the yearly Capital Cash Flows (CCF) for the period from 2021 until 2025. Explain your answer.
[15 marks]
b. Assume the expected nominal growth rate of CCF in perpetuity is 1.75%. What is the expected terminal value of this company? Explain your answer.
[5 marks]
c. What is the expected enterprise value of CALIPSO at the end of the year 2021?
Explain your answer.
[10 marks]
d. “The CCF model follows an equity perspective and is useful to value stand-alone basis projects because it disentangles investment and financing decisions.” Is this statement true or false? Explain your answer.
[10 marks]
Question 2
Consider the information in Table 2 about an investment opportunity that a hedge fund is
considering. Table 2
|
Expected cash flow (CF) year 1 |
€15 million |
|
g – perpetuity growth rate of CF |
2% |
|
k – cost of capital |
10% |
|
K – investment cost |
€190 million |
|
σ – standard deviation of CF |
20% |
|
r – risk free rate |
3% |
|
δ – opportunity cost |
8% |
a. What is the “static” Net Present Value of this investment opportunity? Explain your answer and present the result rounded to one decimal place (example 1.75 to 1.8).
[5 marks]
b. What is the value of this investment opportunity using the Dixit and Pindyck (D&P) model? Explain your answer (use the input β = 3.89 in the D&P model). Present your result rounded to one decimal place.
[15 marks]
c. Consider the following statement “This investment opportunity should be accepted by the hedge fund”. Do you agree? Explain your answer.
[10 marks]
Question 3
A private equity fund focused on venture capital deals is raising capital for a potential transaction. During the fundraising roadshow, a prospective investor stated that in order to invest his minimum deal requirements are:
A preferred return (yield) of at least 10% per year.
Maximum investment time horizon: 4 years, including the investment year, which is assumed to be the current year of 2020.
Minimum internal rate of return (IRR): 16%.
The level of funds to be obtained from this investor is €28 million. Assume that the cash available for the fund is as given in Table 3.
Table 3
|
2021 |
2022 |
2023 |
2024 |
|
€4 million |
€14 million |
€18 million |
€22 million |
a. What is the expected yearly payment to the investor between 2021 and 2023? Explain your answer, decomposing the payment into interest payment, repayment of principal, and extra funds.
[15 marks]
b. Is the stream of expected cash flows to be paid to the prospective investor enough to attract the investor to invest in the private equity fund? Explain your answer.
[5 marks]
c. Consider the following statement: “The extensive use of multiples in the Private Equity world is a guarantee of the high quality of the valuation exercises done”. In your view, is this statement true or false? Explain your answer.
[10 marks]
2022-01-06