NEW VENTURE FINANCINGQuestions & ExercisesBBA3 Course #3Exercise N°1:Machines Unlimited shares are expected to pay dividends of 1.55 Canadian dollars (C$) and C$1.72 atthe end of each of the next two years, respectively. The investor expects the price of the shares at theend of this 2-year holding period to be C$42.00. The investor’s required rate of return is 14%.Calculate the current value of Machines Unlimited shares.Exercise N°2:DownUnder Financial recently paid a dividend of 1.80 Australian dollars (A$). An analyst hasexamined the financial statements and historical dividend policy of DownUnder and expects that thefirm’s dividend rate will grow at a constant rate of 3.5% indefinitely. The analyst also determinesDownUnder’s beta is 1.5, the risk-free rate is 4%, and the expected return on the market portfolio is8%. Calculate the current value of DownUnder’s shares.Exercise N°3:R&M has a current dividend of $1.00 and a required rate of return of 12%. A dividend growth rate of15% is projected for the next two years, followed by a 10% growth rate for the next four years beforesettling down to a constant 4% growth rate thereafter. Calculate the current value of R&M.Exercise N°4:The Prentice Paint Company earned a net profit margin of 20% on revenues of $20 million this year.Fixed capital investment was $2 million, and depreciation was $3 million. Working capital investmentequals 7.5% of sales every year. Net income, fixed capital investment, depreciation, interest expense,and sales are expected to grow at 10% per year for the next five years. After five years, the growth insales, net income, fixed capital investment, depreciation, and interest expense will decline to a stable5% per year. The tax rate is 40%, and Prentice has 1 million shares of common stock outstanding andlong-term debt paying 12.5% interest trading at its par value of $32 million. Calculate the value of thefirm and its equity using the FCFF model if the WACC is 17% during the high-growth stage and 15%during the stable stage.Exercise N°5:Consider a rival to the Prentice Paint Company presented in the previous exercise. Suppose that SiouxFalls Decor also has revenues of $20 million this year. However, we assume that its future performancewill be tracked relative to sales as follows:Sales growth and the net profit margin are projected by year as shown in the following table:Sales and Net Margin ForecastsFixed capital investment net of depreciation is projected to be 30% of the sales increase in each year.Working capital requirements are 7.0% of the projected dollar increase sales in each year.Debt will finance 40% of the investments in net capital and working capital.The company has a 12% required rate of return on equity.The firm has 1 million shares of common stock outstanding.Calculate the value of the equity of Sioux Falls using the two-stage FCFE model.Exercise N°6:Consolidated Pipe Products has a required rate of return of 14%. The current book value is C$6.50.Earnings forecasts for 2019, 2020, and 2021 are C$1.10, C$1.00, and C$0.95, respectively. Dividendsin 2019 and 2020 are forecasted to be C$0.50 and C$0.60, respectively. The dividend in 2021 is aliquidating dividend, which means that Consolidated will pay out its entire book value in dividends andcease doing business at the end of 2021. Calculate the value of Consolidated’s stock using the residualincome model.Exercise N°7:An analyst estimates the EPS of Polar Technology in five years to be C$2.10, the EPS in six years to beC$2.32, and the median trailing industry P/E to be 35. Calculate the terminal value in Year 5.Exercise N°8:An analyst gathered the following data for Boulevard Industries [all amounts in Swiss francs (Sf)]:• Recent share price Sf 22.50• Shares outstanding 40 million• Market value of debt Sf 137 million• Cash and marketable securities Sf 62.3 million• Investments Sf 327 million• Net income Sf 137.5 million• Interest expense Sf 6.9 million• Depreciation and amortization Sf 10.4 million• Taxes Sf 95.9 millionBased on this information, calculate the EV/EBITDA ratio for Boulevard Industries.Exercise N°9:Dracula and Frankenstein (DF) is an new movie producer that specializes in horror movies. Theprojected earnings and cash flow for the company are given below. Steven Lucas invest in the businessand requires a rate of return of 20 percent considering the risk of this investment. Estimate the value ofthe business. Years (Dollars million)123456Assets5075100125140151.2Earnings 12 18 24 30 33.6 36.29Net Investment 25 25 25 15 11.2 12.10Free cash flow-13-7-11522.424.19Earnings growth from previous period(%)50 33.3 25 12 8 The cash flows start growing at a constant rate of 8 percent from the end of 5 years. At this stage, thebusiness is reinvesting one-third of each year’s earnings and is earning a ROE of 24 percent.Exercice N°10:The mean multiple for the 2005 operating profits of comparable peers is 15, and the mean 2005 P/E is25. Calculate the equity value of Pixi Spa. Key figures for the company are:Net debt at December 31, 2003: €100m2005e operating profits: €60m2005e net profits: €32mExercice N°11:The table below shows he forecasts for Management plc (in millions of euros) Year12345Sales39604080420043264458Cost of goods sold17821794180618601917Marketing costs8708979249961026Administrative costs396408420432447Depreciation330315300300300EBIT582666750738768 The company is expecting annual expenditures of 300 per year over the next 5 years; working capitalwill increase by 50 in years 1 and 2, and stabilise thereafter. The following information is also available: The company has net debts today of € 2250m The company’s cost of capital is 7.9% The cost of debt is 6% (before tax) The tax rate is 37% An increase in inflows of 2% to perpetuity can be expected from year 6.Work out the value of Management plc using DCF method.
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