Estimating Hugo Boss's Equity Value Hugo Boss AG is a German designer, manufacturer, and distributer of men's and women's clothing, operating in the higher end of the clothing retail industry. During the period of 2004-2017, the company consistently earned returns on equity in excess of 20 percent, with peaks around 50 to 60 percent, grew its book value of equity (before special dividends) by 5 percent per year, on average, and paid out 65-80 pecent of its profit as dividends. On March 29, 2018, before the publication of the first-quarter results, when Hugo Boss's 69 million common shares trade at about 71 per share, an analyst produces the following forecasts for Hugo Boss. Income Statement (millions) 2018E 2019E 2020E Revenue 2,800 2,925 Profit before Interest and Tax 345 380 3,100 420 Interest Expense 10 5 5 Profit before Tax 335 375 415 Tax Expense 90 100 110 Profit/Loss 245 275 305 Balance Sheet 2017R 2018E 2019E 2020E NOA 1,160 1,195 1,250 1,325 Investment Assets 55 60 60 65 Business Assets 1,215 1,255 1,310 1,390 Shareholder's Equity 915 970 1,040 1,130 Current and Non-current Debt 300 285 270 260 Investment Capital 1,215 1,255 1,310 1,390 Assume that Hugo Boss's cost of equity is 10 percent. 1. Calculate the free cash flow to equity, abnormal profits, and abnormal profit growth for years 2018- 2020. 2. Assume that 2021 Hugo Boss AG liquidates all its assets at their book values, uses the proceeds to pay off debt, and pays out the remainder to its equity holders. What does this assumption imply about company's: Free cash flow to equity holders in 2021 and beyond? Abnormal profits in 2021 and beyond? Abnormal profit growth in 2021 and beyond? 3. Estimate the value of Hugo Boss's equity on March 29, 2018 using the above forecasts and assump- tions. Check that the discounted cash flow model, the abnormal earnings model and the abnormal earnings growth model yield the same outcome. SproUTS Bank is about to take part in a syndicated loan that will require SproUTS bank to lend $20million as a business loan. Risk weights remain unchanged for the new business loan. SproUTS Bank will need to meet capital requirements of Tier1 Capital of 10% and Total Capital of 12%. SproUTS Bank currently has the following balance sheet (in millions of dollars) with the risk weights of assets in the column below. Note, this is the balance sheet prior to the "new loan" issuance. SproUTS Bank balance sheet (in millions of dollars) Assets Risk $ Liabilities & Equity $ Weight Cash 0% 60 Consumer deposits 454 Inter-bank deposits 20% 80 Subordinated debt 20 residential mortgages 50% Business Loans 100% 180 Cumulative preference shares 190 Ordinary shares 10 26 Total Assets $510 $510 Total Liabilities & Equity In addition, SproUTS Bank has $100 million in performance-related standby letter of credit (SLCs), $72 million in one-year forward FX contracts that are currently in the money by $2.8 million, and $660 million in four-year interest rate swaps that are currently in the money by $1 million. Credit conversion factors are: Performance-related standby LCS 50% 1 to 5 year foreign exchange contracts 5% 1 to 5 year interest rate swaps 5 to 10 year interest rate swaps Assume a 100% counterparty risk. 0.5% 1.5% a. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord now and if the new loan is made? [2 marks] b. What are the risk-adjusted off-balance-sheet assets of the bank as defined under the Basel Accord now and if the new loan is made? [2 marks] c. What is the purpose of a credit conversion factors? [2 marks] d. What is the total capital required for both off- and on-balance-sheet assets? [2 marks] e. Does the bank have enough capital to meet the regulatory capital requirements now and when the new loan is made? If not, what minimum Tier 1 or total capital does it need to meet the requirement? [2 marks] f. Briefly explain the impact of Basel III on banks' liquidity requirements. Why was Basel III introduced? [5 marks]