IBF605 Business Valuation and Financial Statement Analysis_Session 1 2021-22
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Second Term Examination, 2021-22
IBF605 Business Valuation and Financial Statement Analysis_Session 1
Question 1 (40%):
Please use the following information to answer question 1.
Esprit de Corporation (“Esprit”) is a fashion brand listed in the Stock Exchange of Hong Kong. Esprit’s consolidated cash flow statement for the year ended 30 June, 2020 is reproduced below.
Exhibit 1
Exhibit 2: Risk free rate reference
Bonds |
Spot Yield |
Hong Kong 5-year Exchange fund note |
2.45% |
5-year US Treasury |
2.63% |
10-year US Treasury |
2.69% |
Fed fund rate |
0.73% |
Exhibit 3: Capital Market Information
⚫ ESPRIT Beta: 1.07 ⚫ Share outstanding: 2831 million ⚫ Implied market risk premium for Hang Seng Index: 7.99%p.a. ⚫ Corporate tax rate applicable to ESPRIT is 15 %. |
1a. What is the FCFE for ESPRIT for 2020? (5%)
1b. What is the FCFF for ESPRIT for 2020? (5%)
1c. What should be ESPRIT’s shareholder’s required rate ofreturn under CAPM assuming the USD and HKD yield curve are of the same shape (5%)?
1d. Assuming a perpetual annual growth rate of2% for ESPRIT’s FCFF, what
would be the target price for ESPRIT’s share (in HKD) given a WACC of 3.8% in 2021? Assuming the liabilities are recorded at fair-value in Exhibit 4 (5%)
Exhibit 4: ESPRIT’s Consolidated Balance Sheet in 2020
1e. If the profit for Esprit in 2021 is HKD 321 million, what is the Residual Income
for ESPRIT in 2021 (5%)
1f. ESPRIT announced zero dividend in 2021. Assuming ESPRIT maintains the
same payout ratio and ROE in the coming 3 years and after that, the residual income will demonstrate a persistent factor of 0.95. What would be the target price for ESPRIT’s share (in HKD) in 2022(Now) under residual income model? (10%)
1g. Instead of using the persistent factor as stipulated in 1f., what would be the fair
value ofESPRIT shares assuming after 3 years of constant ROE and payout ratio after 2021, the shares of ESPRIT will be traded at a Price to Book ratio of 1.4x. (5%)
Question 2 (10% )
What equity valuation model would you use and why you use such model ifyou are ask to value: (10%)
2a) A utility company with profit protection from government with irregular borrowing practices.
2b) An airway which keep borrowing steadily to invest in new aircraft to maintain its production capacity.
2c) A new start up demonstrating high growth
2d) A company with steady growth but fail to pay any dividend
2022-05-14