ECOM105 Valuation 2021
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MSc Examination (Mid term exam) 2021
ECOM105 Valuation
Question 1 (75 marks)
A private equity analyst is valuing a target company that is expected to generate
sales from year 1 onwards as given in Table 1.
Table 1
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
€34000 |
€37500 |
€42300 |
€51000 |
€56700 |
Expected EBIT margin in year 1 is 11%. Additional assumptions are:
• EBIT margin (% sales): increases 55 basis points (0.55%) per year until year 3, including year 3, and decreases 15 basis points (0.15%) per year in years 4 and 5
• Depreciation: 6% of sales, each year
• Recurrent Capex: 8% of sales for year 1, with this percentage decreasing
45 basis points (0.45%) per year until year 4
• Change in working capital: 12% of yearly change of sales
• Tax rate: 25%
• Target capital structure: debt/(debt + equity) ratio of 35%
• Asset beta: 1.55
• Risk-free rate: 2%
• Equity risk premium: 6%
• Debt spread: 3%
• Expected nominal growth rate of Free Cash Flows to the Firm (FCF) in perpetuity: 1.75%
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 Free Cash Flows to the Firm (FCF) for the period from year 1 until year 5, including year 5. Explain your answer.
[25 marks]
b) Consider the following statement: “In the estimation of the Free Cash Flow to the Firm (FCF) that is used to compute the Terminal value, depreciations should be equal to the capital expenditure”. Is this statement true or false? Explain your answer.
[20 marks]
c) Given the set of assumptions reported below Table 1, what is the expected value of the project at the end of year 1? Explain your answer.
[30 marks]
Question 2 (25 marks)
Consider the following statement: “The Equity Free Cash Flow is a cash flow metric not directly reflecting financing decisions and with an enterprise
perspective”. Do you agree with this statement? Explain your answer.
2022-01-06