Challenge question (7 marks) [This question is worth 7 marks. I suggest you flag this question and attempt it last during your test. Taking too much time on this question could be a detriment to success on the other questions. Read the whole question through carefully before attempting to solve You are an equity analyst trying to determine if the stock of a company, currently trading in a range of 590 - $100 a share, is over-valued You feel that investor sentiment has driven the price per share higher than a fundamental valuing of the companys discounted cash flows to equity justifies The company has a capital structure of 90% equity and 10% debt. There are 4432773 common shares outstanding. There are no preferred shares The stock has a beta Bof 1.2 and the equity risk premium is 437594. The risk free rate is 2.25% Their pre-tax cost of debt is 454, and the corporate tax rate is 30% You estimate their cash flows to equity for the next three years as follows: 2024 514848623 519939098 2022 2023 525100000 Given that it can be hard to forecast with reasonable accuracy past this time frame, you decide that in Year 4 you will estimate the terminal value of the cash flows to equity owners. You estimate its Yeard canh how to equity owners will increase 2 over its Year 3 cash flow and do so into infinity To estimate the terminal value; you use what is known as the present value of a perpetuity" form which is CH Where CF is the cash flow for the year in which terminal values estimated, and Res the expected return on equiry, which you have calculated given the Information above As you are not trying to calculate the Enterprise value of the combined cash flows to debt and equity, the appropriate discoure rate is the expected return on equity Once you have estimated the terminal vue, you outount it the appropriate number of years as you have done for the cash rows from 2022 to 2004 Againg up me sum of the encounted cash now provides you the equity value of the company that is what their egy tuld be nung bisa am now to equity owner how much would you be willing to pay for one of the common in 2017 Thomas Challenge question (7 marks) [This question is worth 7 marks. I suggest you flag this question and attempt it last during your test. Taking too much time on this question could be a detriment to success on the other questions. Read the whole question through carefully before attempting to solve You are an equity analyst trying to determine if the stock of a company, currently trading in a range of 590 - $100 a share, is over-valued You feel that investor sentiment has driven the price per share higher than a fundamental valuing of the companys discounted cash flows to equity justifies The company has a capital structure of 90% equity and 10% debt. There are 4432773 common shares outstanding. There are no preferred shares The stock has a beta Bof 1.2 and the equity risk premium is 437594. The risk free rate is 2.25% Their pre-tax cost of debt is 454, and the corporate tax rate is 30% You estimate their cash flows to equity for the next three years as follows: 2024 514848623 519939098 2022 2023 525100000 Given that it can be hard to forecast with reasonable accuracy past this time frame, you decide that in Year 4 you will estimate the terminal value of the cash flows to equity owners. You estimate its Yeard canh how to equity owners will increase 2 over its Year 3 cash flow and do so into infinity To estimate the terminal value; you use what is known as the present value of a perpetuity" form which is CH Where CF is the cash flow for the year in which terminal values estimated, and Res the expected return on equiry, which you have calculated given the Information above As you are not trying to calculate the Enterprise value of the combined cash flows to debt and equity, the appropriate discoure rate is the expected return on equity Once you have estimated the terminal vue, you outount it the appropriate number of years as you have done for the cash rows from 2022 to 2004 Againg up me sum of the encounted cash now provides you the equity value of the company that is what their egy tuld be nung bisa am now to equity owner how much would you be willing to pay for one of the common in 2017 Thomas
