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Example 5.13: See the valuation ratios below for the three largest publicly traded soft drink companies in the U.S. Data is as of 10/25/2019, pulled from FinViz.com. Compute three PE based valuation ratios (Trailing P/E, Forward P/E, PEG) and use them to price Monster Beverage Corporation (MNST), which has a trailing EPS of 1.92, average EPS forecast of 2.25 for next year, and average 5-year EPS growth rate forecast of 11.69%. EPS EPS next 5Y Price 53.75 1.69 Stock Coca Cola Pepsi Keurig EPS next year 2.28 5.96 4.86% 136.64 4.37% 8.13 0.68 27.51 1.41 15.54% You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Which of the following is INCORRECT about an efficient market? O A Prices should respond very quickly to new information. O B Active trading tends to be counterproductive for most investors. 0 C Prices should reflect the true value of the securities at all times. O D it should be very difficult to make money by searching for mispriced securities. O E Trading costs should be low. Example 5.12: A company had total revenues of $200 million, operating profit margin of 20%, and depreciation and amortization expense of $10 million over the trailing twelve months. The company currently has $300 million in total debt and $100 million in cash and cash equivalents. If the company's market capitalization (market value of its equity) is $1 billion, what is its EV/EBITDA ratio? You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Example 5.12: A company had total revenues of $200 million, operating profit margin of 20%, and depreciation and amortization expense of $10 million over the trailing twelve months. The company currently has $300 million in total debt and $100 million in cash and cash equivalents. If the company's market capitalization (market value of its equity) is $1 billion, what is its EV/EBITDA ratio? Solution: EBITDA = EBIT + Depreciation & Amortization = Revenues x Operating profit margin + Depreciation & Amortization = $200 million x 0.2 + $10 million = $50 million EV = Equity + Debt-Cash = $1 billion + $300 million - $100 million = $1.2 billion EV / EBITDA = $1.2 billion/$50 million = 24.0 Reading assessment 5.12 Homework. Unanswered You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Abond has a MacD of 14.6, ModD of 13.8 and DVO1 of $2.5. Suppose its yield to maturity goes down one percentage point (e.g., from 5% to 4%). Which of the following is most likely to be true? (Hint: 1% = 100 basis points) O A The bond's price should decrease by approximately $14.6. O B The bond's price should increase by approximately $13.8. 0 C The bond's price should increase by approximately $2.5. O D The bond's price should increase by approximately 13.8%. O E The bond's price should increase by approximately 14.6%. Example 5.13: See the valuation ratios below for the three largest publicly traded soft drink companies in the U.S. Data is as of 10/25/2019, pulled from FinViz.com. Compute three PE based valuation ratios (Trailing P/E, Forward P/E, PEG) and use them to price Monster Beverage Corporation (MNST), which has a trailing EPS of 1.92, average EPS forecast of 2.25 for next year, and average 5-year EPS growth rate forecast of 11.69%. EPS EPS next 5Y Price 53.75 1.69 Stock Coca Cola Pepsi Keurig EPS next year 2.28 5.96 4.86% 136.64 4.37% 8.13 0.68 27.51 1.41 15.54% You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Which of the following is INCORRECT about an efficient market? O A Prices should respond very quickly to new information. O B Active trading tends to be counterproductive for most investors. 0 C Prices should reflect the true value of the securities at all times. O D it should be very difficult to make money by searching for mispriced securities. O E Trading costs should be low. Example 5.12: A company had total revenues of $200 million, operating profit margin of 20%, and depreciation and amortization expense of $10 million over the trailing twelve months. The company currently has $300 million in total debt and $100 million in cash and cash equivalents. If the company's market capitalization (market value of its equity) is $1 billion, what is its EV/EBITDA ratio? You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Example 5.12: A company had total revenues of $200 million, operating profit margin of 20%, and depreciation and amortization expense of $10 million over the trailing twelve months. The company currently has $300 million in total debt and $100 million in cash and cash equivalents. If the company's market capitalization (market value of its equity) is $1 billion, what is its EV/EBITDA ratio? Solution: EBITDA = EBIT + Depreciation & Amortization = Revenues x Operating profit margin + Depreciation & Amortization = $200 million x 0.2 + $10 million = $50 million EV = Equity + Debt-Cash = $1 billion + $300 million - $100 million = $1.2 billion EV / EBITDA = $1.2 billion/$50 million = 24.0 Reading assessment 5.12 Homework. Unanswered You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $40 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 15.0. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place. Numeric Answer: Abond has a MacD of 14.6, ModD of 13.8 and DVO1 of $2.5. Suppose its yield to maturity goes down one percentage point (e.g., from 5% to 4%). Which of the following is most likely to be true? (Hint: 1% = 100 basis points) O A The bond's price should decrease by approximately $14.6. O B The bond's price should increase by approximately $13.8. 0 C The bond's price should increase by approximately $2.5. O D The bond's price should increase by approximately 13.8%. O E The bond's price should increase by approximately 14.6%