Hi there, this is a practice case study and I would like compare my answers with an expert.

The following mini-case requires you to use the FCFF model, and the following numbers are in thousands of RMB (currency of China) unless told otherwise. Hint: Draw a timeline and label the cash flows and discount rates on the timeline, which will make this mini-case much easier to understand. Its 2:00 a.m. on June 13 , 2022. You are putting in extra work for this investment analysis group project

to prove yourself in front of your teammates because they blamed you for picking a holding company that has so many subsidiary companies in different fields. It took you quite a while to consolidate the subsidiary firms and get the most recent trailing and normalized 12-month accounting report from the 10Ks and the 10Qs. Thankfully, Friday Holding Inc, the Chinese technology firm you picked, has positive earnings so that you do not have to deal with that troublesome negative earnings and volatile working capitals dealt by Group T3SLA. You and your group members sorted out the following information that is most relevant to your DCF valuations.

The firms current EBIT is 13,379.30, and its current interest expense is 2,552.60. It has a current capital spending of 6,033.90 and a current depreciation and amortization of 3,562.00. The effective tax rate and marginal tax rate for Friday happens to be the same, which is 34.00%. For the current year, Friday has revenues of 70,103.10, inventories of 862.40, accounts receivable of 7,593.60, accounts payable of 3,619.00, a book value of debt of 26,090.00, a book value of equity of 9,154.00, a cash and marketable securities value of 9,602.00, and a non-operating assets value of 6,098.00. For the previous year-end, Friday has revenues of 63,457.00, inventories of 1,087.70, accounts receivable of 6,413.40, accounts payable of 3,122.70, a book value of debt of 22,072.00, a book value of equity of 13,061.00, a cash and marketable securities value of 12,869.00, and a non-operating assets value of 5,666.00.

Friday is currently being traded on NYSE and its most recent stock price is $60.61. One U.S. dollar is now worth 6.3267 RMB. It currently has 441,710 common shares outstanding. The firm has some preferred shares outstanding, and luckily it is less than 5.00% of the firms current outstanding market value, thus your group decided to ignore the preferred shares. The firm has no convertible debts outstanding at the moment.

The long-term real risk free rate is 5.98% and China has a current inflation of 5.00%. Your team decided to calculate the precise nominal risk free rate instead of using the Fisher Effect to get an approximate number. Based on the firms interest rate coverage ratio, you estimated the firms credit rating to be Baa2/BBB and the company default spread to be 1.27%. The U.S. equity risk premium is 5.08% and the China country default spread is 0.72% in 2018. Currently, the standard deviation in the Shanghai Composite Stock Market Index is 33.75% and the standard deviation in China government bond is 30.00%. The average Chinese firm gets about 80% of its revenues in China, and Friday get 47.86% of its revenues in China. One of your teammate did an excellent job on estimating the bottom-up beta, and the estimated value is 1.68 for the current year. Your teammates estimated the current ROC to increase about 10.00% next year.

Based on the qualitative analysis, you decided to use a two-stage DCF model and a high growth period of 5 years for Friday. In the stable growth period, you estimated the ROC to be 25.00%, the growth rate to be 10.00%, and the cost of capital to be 15.00%. Your team is assuming the growth rate and the cost of capital will gradually change to the stable growth rate and stable cost of capital, respectively, during the high growth period in a straight line fashion. While calculating the market value of debt, the pretax cost of debt is assumed to be fixed across the years. Your team decided to ignore the short-term debt, and you estimated that the firm has a 4-year average maturity of debt. In addition, you decided to do no adjustment on the market value of equity.

Last but not the least, your team decided to capitalize the R&D expenses and convert the operating lease expenses to debt. The current R&D expense is 17,710.00. You estimated a 5-year amortizable life for the R&D, and the R&D expenses one year ago to five years ago are 16,780.00, 15,290.00, 13,670.00, 12,670.00, and 12,050.00, respectively. You assumed that R&D expenses are spent at the end of each year. The current operating lease expense is 5,040.00. You estimated a 6-year life for the operating lease assets, and the future commitments from year one to year six are 4,530.00, 3,710.00, 2,650.00, 1,800.00, 1,220.00, and 2,590.00, respectively. You decided to use a straight line depreciation method for both R&D and operating lease expenses.

After a sip of coffee and with a bitter smile on your face, you begin the journey of calculating the intrinsic value of Friday Holding Inc:

a) What is the current year FCFF ( ) for Friday? 0

b) What is the current year weighted average cost of capital (0) for Friday?

c) What is the terminal value at the end of the high growth period?

d) What is the firm value now according to your fundamental analysis?

e) Is the firm overvalued or undervalued? By how much in percentage?