Questions

25_2 FIN375 Capital Markets

Short answer

Future Ex Corp has total assets of CHF460’000’000 of which CHF60’000’000 is Equity. The cost of Equity is twelve percent and the cost of Debt is ten percent. Its cash flows from operating activities are CHF25’000’000 for year one and dividends paid to the firm’s shareholders represent 12% of the Cashflows from operating activities. Capital expenditures were CHF2’000’000 and Free Cash Flows are estimated to increase by 17% for 5 years. Assume the growth horizon of Cash Flows beyond year 5 is 6%. The firm has non-operating assets of CHF30’000’000 and its shares outstanding are 3’500’000. Required: 1. Compute the stock price using the corporate valuation method. Remember to find the WACC and FCF first. 2. If the market value per share of Future Ex Corp is CHF100, would you buy this stock. Justify your answer 3. You have done a bit of research and found out that Future Ex’s two main competitors’ share prices are $10 and $15. If you were to bring down Future Ex’s stock price to $12 per share, what could you do? Show calculations

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Step-by-Step Analysis

Let’s break down the provided solution steps and assess each part methodically, highlighting what is sound and where there could be issues. Evaluation of 1. Stock Price Calculation Using Corporate Valuation Method: - Step 1: WACC calculation - The solution identifies Equity = CHF 60,000,000 and Debt = CHF 460,000,000 − CHF 60,000,000 = CHF 400,000,000, with V = 460,000,000. This is correct given the data about total assets and equity. However, a caveat is the tax treatment: the note says assume no taxes since not specified. In many corporate valuation problems, taxes matter for after-tax cost of debt; here the assumption of no taxes is explicit, so using Rd = 10% is acceptable under this assumption. - The weights are E/V = 60/460 and D/V = 400/460. The computed WACC, (E/V)Re + (D/V)Rd, becomes (60/460)*0.12 + (400/460)*0.10. The arithmetic 60/460 ≈ 0.1304, and 400/460 ≈ 0.8696. Then 0.1304*0.12 ≈ 0.01565, and 0.8696*0.10 ≈ 0.08696. Sum ≈ 0.10261 or about 10.26%. - This result aligns with the given numbers, so the WACC value is reasonable given the inputs and the assumption about taxes. A potential improvement would be to show the exact fractions or retain more decimals to reduce rounding risk, but the final figure is coherent. - Step 2: FCF1 calculation - FCF1 = Operating cash flow − CapEx = 25,000,000 − 2,000,000 = 23,000,000. This is consistent with the standard FCF definition used here (unlevered free cash flow for corporate valuation). - Step 3: Five-year projection with 17% growth - The plan to grow FCF by 17% each year for five years (FCF2 through FCF5) is correct in......Login to view full explanation

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