Kindly help with these finance questions. Please see attached document below for the questions and solution templates.

PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. 1.66 48% 1.13 20.88 12% $ $ Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B P/E Return on Equity % 27.716 14.77% 19.9 16.20% 17.622 19.63% 11.08 22.94% 24.959 7.81% 21.152 12.61% 22.667 15.42% 23.025 16.93% 18.049 25.67% Solution Intel Comparison to Industry a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate d. Estimated future dividends Year 2007 $ 2008 2009 2010 2011 Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value Earnings 1.13 Dividends The growth rate in earnings value of Intel's shares $20.8 Goal Seek. PROBLEM 8-9 Given Dividend Yield % 1.90% 1.30% 1.90% 0.50% 0.70% 0.00% 1.90% 1.90% 0.60% Long-term Debt to Equity 0.691 0.096 0.064 0.004 0.209 0.138 NA NA 0.012 Solution The growth rate in earnings that makes the value of Intel's shares $20.88 is found using Goal Seek. Price to Book Value Net Profit Margin 5.588 10.39% 3.42 15.50% 3.437 18.72% 3.71 18.67% 1.764 8.24% 2.088 10.13% 3.342 21.48% 3.681 21.39% 4.481 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 9-9 a. Claymore Mining Company Given Unlevered Cost of Capital FCF 10.00% $ 1 4,000,000.00 $ 2 4,000,000.00 $ Year 3 4,000,000.00 Solution Present value of free cash flows: Planning period Terminal value Enterprise Value b. Shameless Commerce, Inc. Given Unlevered Cost of Capital growth rate in terminal cash flows 10.00% 3.00% Year FCF $ 1 1,000,000.00 $ 2 1,000,000.00 $ 3 1,000,000.00 Solution Valuing the unlevered cash flows Planning period Terminal value Enterprise Value c. Dustin Electric, Inc. Given K-WACC (Cost of capital) growth rate in terminal cash flows Corporate tax rate Cost of debt Unlevered cost of equity 10.00% 2.00% 0.30 0.10 15.00% Solution Year 0 FCF Debt Interest Tax shields After-tax interest debt principal paid Equity FCF Valuing the unlevered cash flows Planning period Terminal value $ $ 10,000,000.00 1 3,000,000.00 $ 2 3,000,000.00 Valuing the interest tax savings Planning period Terminal value Enterprise Value = Value of the unlevered firm + Value of interest tax savings Less: Debt (at time 0) Equity Value BLEM 9-9 Solution Legend = Value given in problem = Formula/Calculation/Analysis r = Qualitative analysis or Short an = Goal Seek or Solver cell = Crystal Ball Input Year $ 4 4,000,000.00 5 ### $ 6+ 5,000,000.00 = Crystal Ball Output Year $ 4 1,000,000.00 $ Year 3 3,000,000.00 5 ### $ 6+ 1,030,000.00 ### $ 5 3,000,000.00 olution 4 6+ Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 10-7 Given Target EBITDA sales multiples EBITDA (Year 5) Funds raised Cash (Year 5) Interest bearing debt (year 5) Investment horizon for VC Dividend rate on common Coupon (convertible bonds) Dividend rate (convertible pfd) 6.00 1,200,000 500,000 300,000 2,000,000 5 years $ $ $ $ $ Alternative Deal Structures Stated Rate of Return 0.00% 10.00% 10.00% 7.00 Ownership % 60.00% 40.00% 45.00% Solution a. Enterprise valuation 6 times multiple Enterprise Value = EBITDA x EBITDA Multiple Less: Net Debt = Interest Bearing Debt - Cash Equity Value in year 5 (1,700,000) b. Analysis of alternative deal structures Common Stock $ Terminal cash flow (equity ownership) % Required Return by VC Convertible Bonds Annual interest $ Terminal cash flow (equity ownership) % Required Return by VC Preferred Stock Annual dividends $ Terminal cash flow (equity ownership) % Required Return by VC c. Analysis of pre- and post-money values of Brazos Winery's equity Common Stock Post-money value of the firm's equity Less: Invested Capital (500,000.00) Pre-money value Convertible Debt Post-money value of the firm's equity Less: Invested Capital Pre-money value Convertible Preferred Stock Post-money value of the firm's equity Less: Invested Capital Pre-money value (500,000.00) (500,000.00) 7 times multiple (1,700,000) Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 11-5 Given Available gas (MCF) Price of Gas (today) Gas Price Next Year High Low Forward price for next year Development cost per MCF Debt (on the property) Interest rate on debt Debt maturity Asking price for Equity Risk free rate of interest Income tax rate Option Exercise price/MCF $ $ $ $ $ $ $ $ 50,000,000 14.03 per MCF 18.16 12.17 14.87 4.00 450,000,000 10% 1 year 50,000,000 6.0% 0.0% 13.90 Solution a. Hedging (with futures) analysis Revenue (hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income Less: Principal Payment Equity FCF $ (450,000,000) Since there is only one Equity FCF (a sure value) and it is less than the $50 million asking price for the equity, the investment should not be made if the future oil revenue is going to be hedged. Estimated value of the equity b. Real Option analysis High Price for Gas Revenue (Not hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income Less: Principal Payment Equity FCF $ Low Price for Gas (450,000,000) $ (450,000,000) Calculating the risk neutral probabilities Risk Neutral Pbs High price oil Low price oil Option Payout Product Sum Risk Neutral Expected Equity FCF Equity Value $ $ - c. Valuing a Call Option on natural gas with an exercise price of 13.90 per MCF Option Payouts Risk Neutral Pb High price oil ($18.16/MCF) Low price oil ($12.17/MCF) Expected Payout Call Value Buy 50 m calls Product Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Present value of expected Equity FCF for year 1 where gas revenues are sold forward (hedged). Discounted at the risk free rate. Use forward price to calculate the risk neutral probability, i.e., The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the gas venture. FIN 630 Show your work in excel worksheet; showing your work will also ease getting partial credit. Using the templates will make it easier for you to solve the problems. I have shown the available points for each problem. Question 1. Answer the problem #8-9 on page 299-302 from the TM textbook. (25 points) Question 2. Answer the problem #9-9 on pages 352-353 from the TM textbook. (30 points) Question 3. Answer the problem #10-7 on pages 394-395 from the TM textbook. (25 points) Question 4. Answer the problem #11-5 on page 429 from the TM textbook. (20 points) GOOD LUCK. Problem 8-9 Intel Corporation is a leading manufacturer of semiconductor chips. The firm was incorporated in 1968 in Santa Clara, California, and represents one of the greatest success stories of the computer age. Although Intel continues to grow, the industry in which it operates has matured so there is some question whether the firm should be evaluated as a high-growth company or stablegrowth company from now on. For example, in December 2007, the firm's shares were trading for $20.88 and has a price-earnings ratio of 17.622. Compared to Google Inc.'s price-earnings ratio of 53.71 on the same date, it would appear that the decision has already been made by the market. Intel's expected earnings for 2007 are $1.13 per share, and its payout ratio was 48%. Furthermore, selected financial data for the sector, industry, and seven of the largest firms (including Intel) are found below in Exhibit P8-9.1on page 301 a. Is Intel's current stock price of $20.88 reasonable in light of its sector, industry, and comparison firms? b. Intel has a beta coefficient equal to 1.66. If we assume a risk free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Intel's stock using the CAPM? What rate of growth in earnings is consistent with Intel's policy of paying out 48% of earnings in dividends and the firm's historical return on equity? Using your estimated growth rate, what is the value of Intel's shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model. c. Using your analysis in problem 8-9(b), what growth rate is consistent with Intel's current share price of $20.88? d. Analysts expect Intel's earnings to grow at a rate of 12% per year over the next five years. What rate of growth from year 6 forward (forever) is needed to warrant Intel's current stock price (use your CAPM estimate of the required rate of return on equity)? (Hint: use a two-stage growth model where Intel's earnings grow for five years at 12% and from year 6 forward at a constant rate.) 1 FIN 630 Problem 9-9 TERMINAL-VALUE ANLYSIS Terminal value refers to the valuation attached to the end of the planning period; it captures the value of all subsequent cash flows. Estimate the value today for each of the following sets of future cash flow forecasts. a. Claymore mining company anticipates that it will earn firm FCFs of $4 million per year for each of the next five years. Beginning in year 6, the firm will earn FCF of $5 million per year for the indefinite future. If claymore's cost of capital is 10%, what is the value of the firm's future cash flows? b. Shameless commerce Inc. has no outstanding debt and is being evaluated as a possible acquisition. Shameless's FCF for the next five years are projected to be $1 million per year, and, beginning in year 6, the cash flows are expected to begin growing at the anticipated rate of inflation which is currently 3% per annum. If the cost of capital for shameless is 10%, what is your estimate of the present value of the FCF? c. Dustin electric Inc. is about to be acquired by the firm's management from the firm's founder for 15 million in cash. The purchase price will be financed with $10 million in notes that are to be repaid in 2 million increments over the next five years. At the end of this five-year period, the firm will have no remaining debt. The FCFs are expected to be $3 million a year for the next five years. Beginning in year 6, the FCFs are expected to grow at a rate of 2% per year into the indefinite future. If the unlevered cost of equity for Dustin is approximately 15% and the firm's borrowing rate on the buyout debt is 10% (before taxes at a rate of 30%), what is your estimate of the value of the firm? Problem 10-7 VC VALUATION AND DEAL STRUCTURING Brazos Winery was established eight years ago by Anna and Jerry Lutz with the purchase of 200 acres of land. The purchase was followed by a period of intensive planting and development of the grape vineyard. The vineyard is now entering its second year of production. In March 2015, the Lutz determined that they needed to raise $500,000 to purchase equipment to bottle their private-label wines. Unfortunately, they have reached the limits of what their banker can finance and have put all their personal financial resources into the business. In short, they need more equity capital, and they cannot provide it themselves. Their banker recommended that they contact a venture capital (VC) firm in New Orleans that sometimes makes investments in ventures such as the Brazos Winery. He also recommended that they prepare for the meeting by organizing their financial forecast for the next five years. The banker explained that VCs generally target a five-year term for their investments, so it was important that they provide the information needed to value the winery at the end of five years. After doing a careful analysis, the Lutzes, estimate that their venture will generate earnings before interest, taxes, depreciation, and amortization (EBITDA) in five years of $1.2 million. In addition to the EBITDA forecast, the Lutzes estimate that they will need to borrow $2.4 million by 2019 to fund additional expansion of their operations. Their banker indicated that his bank could be counted on for $2 million in debt, assuming they were successful in raising the needed equity funds from the VC. Furthermore, the remaining $400,000 would be in the form of 2 FIN 630 accounts payable. Finally, the Lutzes believe that their cash balance will reach $300,000 at the end of five years. The Lutzes are particularly concerned about how much of the firm's ownership they will have to give up in order to entice the VC to invest. The VC offers three alternative ways of funding the winery's $500,000 financing requirements; each alternative calls for a different ownership share: Straight common stock that pays no dividend. With this option, the VC asks for 60% of the firm's common stock in five years. Convertible debt paying 10% annual interest and 40% of the firm's common stock at conversion in year 5. Convertible preferred stock with a 10% annual dividend and the right to convert the preferred stock into 45% ownership of the firm's common stock at the end of year 5. a. If the VC estimates that the winery should have an enterprise value equal to six to seven times estimated EBITDA in five years, what do you estimate the value of the winery to be in 2019? What will the equity in the firm be worth? (Hint: Consider both the six- and seven-times-EBITDA multiple.) b. Based on the deal terms offered, what rate of return does the VC require for each of the three financing alternatives? Which alternative should the Lutzes select based on the expected cost of financing? c. What is the pre- and post-money value of the firm based on the three sets of deal terms offered by the VC? Why are the estimates different for each of the deal structures? d. How is the cost of financing affected by the EBITDA multiple used to determine enterprise value? Is it in the VC's best interest to exaggerate the size of the multiple or to be conservative in his estimates? Is it in the entrepreneurs' best interest to exaggerate the estimated EBITDA levels or to be conservative? If entrepreneurs are naturally optimistic about their firm's prospects, how should the VC incorporate this into his deal-structuring considerations? e. Discuss the pros and cons of the alternative sources of financing. Problem 11-5 USING DERIVATIVES TO ANALYZE A NATURAL GAS INVESTMENT Morrison Oil and Gas is faced with an interesting investment opportunity. The investment involves the exploration for a significant deposit of natural gas in southeastern Louisiana near Cameron. The area has long been known for its oil and gas production, and the new opportunity involves developing and producing 50,000 cubic feet (MCF) of gas. Natural gas is currently trading around $14.03 per MCF; the price next year, when the gas is produced and sold, could be as high as $18.16 or as low as $12.17. Furthermore, the forward price of gas one year hence is currently $14.87. If Morrison acquires the property, it will face a cost of $4.00 per MCF to develop the gas. The company trying to sell the gas field has a note of $450 million on the property that requires repayment in one year plus 10% interest. If Morrison buys the property, it will have to assume this note and responsibility for repaying it. However, the note is nonrecourse; if the owner of the property decides not to develop the property in on year, the owner can simply transfer ownership of the property to the lender. 3 FIN 630 The property's current owner is a major oil company that is in the process of fighting off an attempted takeover; thus, it needs cash. The asking price for the equity in the property is $50 million. The problem faced by Morrison's analysts is whether the equity is worth this amount. Answer the following assuming zero taxes. a) Estimate the value of the equity in the project for the case where all the gas is sold forward at the $14.87-per-MCF price. The risk-free rate of interest is currently 6%. b) Alternatively, Morrison could choose to wait a year to decide on developing it. By delaying, the firm chooses whether or not to develop the property based on the price per MCF at year-end. Analyze the value of the equity of the property under this scenario. c) The equity in the property is essentially a call option on 50 MCF of natural gas. Under the conditions stated in the problem, what is the value of a one-year call option on natural gas with an exercise price of 13.90 MCF worth today? (hint: use the binomial option pricing model). 4 PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) 1.66 48% 1.13 20.88 12% $ $ Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B P/E Return on Equity % 27.716 14.77% 19.9 16.20% 17.622 19.63% 11.08 22.94% 24.959 7.81% 21.152 12.61% 22.667 15.42% 23.025 16.93% 18.049 25.67% Solution Intel Comparison to Industry Below Above Above Below Same Above Below a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price 13.32% 10.21% $17.43 c. Imputed growth rate 10.72% d. Estimated future dividends Year 2007 $ 2008 2009 2010 2011 Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value 10.60% $ $ $ 2.34 18.54189377 20.88 Earnings 1.13 1.2656 1.417472 1.587569 1.778077 Dividends $0.54 $0.61 $0.68 $0.76 $0.85 The growth rate in earnings that makes th value of Intel's shares $20.88 is found us Goal Seek. PROBLEM 8-9 Given Dividend Yield % 1.90% 1.30% 1.90% 0.50% 0.70% 0.00% 1.90% 1.90% 0.60% Long-term Debt to Equity 0.691 0.096 0.064 0.004 0.209 0.138 NA NA 0.012 Solution h rate in earnings that makes the el's shares $20.88 is found using Price to Book Value Net Profit Margin 5.588 10.39% 3.42 15.50% 3.437 18.72% 3.71 18.67% 1.764 8.24% 2.088 10.13% 3.342 21.48% 3.681 21.39% 4.481 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 9-9 a. Claymore Mining Company Given Unlevered Cost of Capital FCF 10.00% $ 1 4,000,000.00 $ 2 4,000,000.00 $ Year 3 4,000,000.00 Solution Present value of free cash flows: Planning period Terminal value Enterprise Value $15,163,147.08 $ 50,000,000.00 $65,163,147.08 b. Shameless Commerce, Inc. Given Unlevered Cost of Capital growth rate in terminal cash flows 10.00% 3.00% Year FCF $ 1 1,000,000.00 $ 2 1,000,000.00 $ 3 1,000,000.00 Solution Valuing the unlevered cash flows Planning period Terminal value Enterprise Value c. Dustin Electric, Inc. $ $3,790,786.77 9,136,413.75 $12,927,200.52 Given K-WACC (Cost of capital) growth rate in terminal cash flows Corporate tax rate Cost of debt Unlevered cost of equity 10.00% 2.00% 0.30 0.10 15.00% Solution Year 0 FCF Debt Interest Tax shields After-tax interest debt principal paid Equity FCF Valuing the unlevered cash flows Planning period Terminal value 1 $ 3,000,000.00 $ $ 10,000,000.00 10,000,000.00 1,000,000.00 300,000.00 700,000.00 2,000,000.00 $ 300,000.00 $ 2 3,000,000.00 8,000,000.00 800,000.00 240,000.00 560,000.00 2,000,000.00 440,000.00 $ 10,056,465.29 $ 11,702,775.46 Valuing the interest tax savings Planning period Terminal value $ $ Enterprise Value = Value of the unlevered firm + Value of interest tax savings Less: Debt (at time 0) Equity Value 725,527.94 - BLEM 9-9 Solution Legend Year $ 4 4,000,000.00 5 ### $ 6+ 5,000,000.00 = Value given in problem = Formula/Calculation/Analysis r = Qualitative analysis or Short an = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Year $ 4 1,000,000.00 5 ### $ 6+ 1,030,000.00 olution $ $ $ Year 3 3,000,000.00 6,000,000.00 600,000.00 180,000.00 420,000.00 2,000,000.00 580,000.00 $ 21,759,240.76 4 ### $ 4,000,000.00 400,000.00 120,000.00 280,000.00 2,000,000.00 720,000.00 $ 5 6+ 3,000,000.00 $ 23,538,461.54 2,000,000.00 200,000.00 60,000.00 140,000.00 2,000,000.00 860,000.00 $ 23,538,461.54 $ 725,527.94 $ $ $ 22,484,768.69 10,000,000.00 12,484,768.69 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 10-7 Given Target EBITDA sales multiples EBITDA (Year 5) Funds raised Cash (Year 5) Interest bearing debt (year 5) Investment horizon for VC Dividend rate on common Coupon (convertible bonds) Dividend rate (convertible pfd) 6.00 1,200,000 500,000 300,000 2,000,000 5 years $ $ $ $ $ Alternative Deal Structures Stated Rate of Return 0.00% 10.00% 10.00% 7.00 Ownership % 60.00% 40.00% 45.00% Solution a. Enterprise valuation 6 times multiple $7,200,000 (1,700,000) $5,500,000 7 times multiple $8,400,000 (1,700,000) $6,700,000 b. Analysis of alternative deal structures Common Stock $ Terminal cash flow (equity ownership) % Required Return by VC $3,300,000 45.85% $4,020,000 51.72% Convertible Bonds Annual interest $ Terminal cash flow (equity ownership) % Required Return by VC $50,000 $2,200,000 40.67% $50,000 $2,680,000 45.76% Preferred Stock Annual dividends $ Terminal cash flow (equity ownership) % Required Return by VC $50,000 $2,475,000 43.68% $50,000 $3,015,000 48.91% Enterprise Value = EBITDA x EBITDA Multiple Less: Net Debt = Interest Bearing Debt - Cash Equity Value in year 5 c. Analysis of pre- and post-money values of Brazos Winery's equity Common Stock Post-money value of the firm's equity $833,333.33 Less: Invested Capital (500,000.00) Pre-money value $333,333.33 Convertible Debt Post-money value of the firm's equity Less: Invested Capital Pre-money value $1,250,000.00 (500,000.00) $750,000.00 Convertible Preferred Stock Post-money value of the firm's equity Less: Invested Capital Pre-money value $1,111,111.11 (500,000.00) $611,111.11 d. When the EDITDA multiple increases, it increases the cost. For VC's it is best to exaggerate the EBITDA multiple size. to be conservative in the EBITDA multiple size. In case if the entrepreneurs are naturally optimistic about their firm's pr be more lenient or flexible to incorporate this into his deal-structuring considerations. e. The alternate source of financing includes Equity Financing, Debt Financing and Preferred stock financing. Among this posses the highest risk as well as highest return. The preferred stock equity financing is next to the equity which is less at the same time gives less returns than the equity financing. The debt finanicng is the least in terms of risk when comp patterns mentioned earlier. At the same time this gives the least returns when compared to the other two sourcing type Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output e the EBITDA multiple size. For entrepruneurs it is best timistic about their firm's prospects, then the VC must stock financing. Among this three Equity Financing xt to the equity which is less risky than the equity and t in terms of risk when compared to the other two the other two sourcing types. PROBLEM 11-5 Given Available gas (MCF) Price of Gas (today) Gas Price Next Year High Low Forward price for next year Development cost per MCF Debt (on the property) Interest rate on debt Debt maturity Asking price for Equity Risk free rate of interest Income tax rate Option Exercise price/MCF $ $ $ $ $ $ $ $ 50,000,000 14.03 per MCF 18.16 12.17 14.87 4.00 450,000,000 10% 1 year 50,000,000 6.0% 0.0% 13.90 Solution a. Hedging (with futures) analysis Revenue (hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income $ $ $ $ 743,500,000 (200,000,000) (45,000,000) 498,500,000 498,500,000 Less: Principal Payment Equity FCF $ $ (450,000,000) 48,500,000 $ Since there is only one Equity FCF (a sure value) and it is less than the $50 million asking price for the equity, the investment should not be made if the future oil revenue is going to be hedged. Estimated value of the equity $45,754,716.98 b. Real Option analysis Revenue (Not hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income Less: Principal Payment Equity FCF High Price for Gas $ 908,000,000 (200,000,000) $ (45,000,000) $ 663,000,000 $ $ 663,000,000 $ (450,000,000) $ 213,000,000 Low Price for Gas $ 608,500,000 (200,000,000) $ (45,000,000) $ 363,500,000 $ $ 363,500,000 $ (450,000,000) $ (86,500,000) Calculating the risk neutral probabilities High price oil Low price oil Risk Neutral Pbs Option Payout 45.1% $ 213,000,000 54.9% $ - Product 96,010,016.69 - Sum Risk Neutral Expected Equity FCF Equity Value $ $ 96,010,016.69 96,010,017 90,575,487 c. Valuing a Call Option on natural gas with an exercise price of 13.90 per MCF Option Payouts Risk Neutral Pb High price oil ($18.16/MCF) $ 4.26 45.1% Low price oil ($12.17/MCF) $ 54.9% Expected Payout Call Value Buy 50 m calls Product $ $ $ $ $ 1.92 1.92 1.81 90,575,487 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Present value of expected Equity FCF for year 1 where gas revenues are sold forward (hedged). Discounted at the risk free rate. Use forward price to calculate the risk neutral probability, i.e., The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the gas venture. PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) 1.66 48% 1.13 20.88 12% $ $ Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B P/E Return on Equity % 27.716 14.77% 19.9 16.20% 17.622 19.63% 11.08 22.94% 24.959 7.81% 21.152 12.61% 22.667 15.42% 23.025 16.93% 18.049 25.67% Solution Intel Comparison to Industry Below Above Above Below Same Above Below a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price 13.32% 10.21% $17.43 c. Imputed growth rate 10.72% d. Estimated future dividends Year 2007 $ 2008 2009 2010 2011 Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value 10.60% $ $ $ 2.34 18.54189377 20.88 Earnings 1.13 1.2656 1.417472 1.587569 1.778077 Dividends $0.54 $0.61 $0.68 $0.76 $0.85 The growth rate in earnings that makes th value of Intel's shares $20.88 is found us Goal Seek. PROBLEM 8-9 Given Dividend Yield % 1.90% 1.30% 1.90% 0.50% 0.70% 0.00% 1.90% 1.90% 0.60% Long-term Debt to Equity 0.691 0.096 0.064 0.004 0.209 0.138 NA NA 0.012 Solution h rate in earnings that makes the el's shares $20.88 is found using Price to Book Value Net Profit Margin 5.588 10.39% 3.42 15.50% 3.437 18.72% 3.71 18.67% 1.764 8.24% 2.088 10.13% 3.342 21.48% 3.681 21.39% 4.481 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 9-9 a. Claymore Mining Company Given Unlevered Cost of Capital FCF 10.00% $ 1 4,000,000.00 $ 2 4,000,000.00 $ Year 3 4,000,000.00 Solution Present value of free cash flows: Planning period Terminal value Enterprise Value $15,163,147.08 $ 50,000,000.00 $65,163,147.08 b. Shameless Commerce, Inc. Given Unlevered Cost of Capital growth rate in terminal cash flows 10.00% 3.00% Year FCF $ 1 1,000,000.00 $ 2 1,000,000.00 $ 3 1,000,000.00 Solution Valuing the unlevered cash flows Planning period Terminal value Enterprise Value c. Dustin Electric, Inc. $ $3,790,786.77 9,136,413.75 $12,927,200.52 Given K-WACC (Cost of capital) growth rate in terminal cash flows Corporate tax rate Cost of debt Unlevered cost of equity 10.00% 2.00% 0.30 0.10 15.00% Solution Year 0 FCF Debt Interest Tax shields After-tax interest debt principal paid Equity FCF Valuing the unlevered cash flows Planning period Terminal value 1 $ 3,000,000.00 $ $ 10,000,000.00 10,000,000.00 1,000,000.00 300,000.00 700,000.00 2,000,000.00 $ 300,000.00 $ 2 3,000,000.00 8,000,000.00 800,000.00 240,000.00 560,000.00 2,000,000.00 440,000.00 $ 10,056,465.29 $ 11,702,775.46 Valuing the interest tax savings Planning period Terminal value $ $ Enterprise Value = Value of the unlevered firm + Value of interest tax savings Less: Debt (at time 0) Equity Value 725,527.94 - BLEM 9-9 Solution Legend Year $ 4 4,000,000.00 5 ### $ 6+ 5,000,000.00 = Value given in problem = Formula/Calculation/Analysis r = Qualitative analysis or Short an = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Year $ 4 1,000,000.00 5 ### $ 6+ 1,030,000.00 olution $ $ $ Year 3 3,000,000.00 6,000,000.00 600,000.00 180,000.00 420,000.00 2,000,000.00 580,000.00 $ 21,759,240.76 4 ### $ 4,000,000.00 400,000.00 120,000.00 280,000.00 2,000,000.00 720,000.00 $ 5 6+ 3,000,000.00 $ 23,538,461.54 2,000,000.00 200,000.00 60,000.00 140,000.00 2,000,000.00 860,000.00 $ 23,538,461.54 $ 725,527.94 $ $ $ 22,484,768.69 10,000,000.00 12,484,768.69 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 10-7 Given Target EBITDA sales multiples EBITDA (Year 5) Funds raised Cash (Year 5) Interest bearing debt (year 5) Investment horizon for VC Dividend rate on common Coupon (convertible bonds) Dividend rate (convertible pfd) 6.00 1,200,000 500,000 300,000 2,000,000 5 years $ $ $ $ $ Alternative Deal Structures Stated Rate of Return 0.00% 10.00% 10.00% 7.00 Ownership % 60.00% 40.00% 45.00% Solution a. Enterprise valuation 6 times multiple $7,200,000 (1,700,000) $5,500,000 7 times multiple $8,400,000 (1,700,000) $6,700,000 b. Analysis of alternative deal structures Common Stock $ Terminal cash flow (equity ownership) % Required Return by VC $3,300,000 45.85% $4,020,000 51.72% Convertible Bonds Annual interest $ Terminal cash flow (equity ownership) % Required Return by VC $50,000 $2,200,000 40.67% $50,000 $2,680,000 45.76% Preferred Stock Annual dividends $ Terminal cash flow (equity ownership) % Required Return by VC $50,000 $2,475,000 43.68% $50,000 $3,015,000 48.91% Enterprise Value = EBITDA x EBITDA Multiple Less: Net Debt = Interest Bearing Debt - Cash Equity Value in year 5 c. Analysis of pre- and post-money values of Brazos Winery's equity Common Stock Post-money value of the firm's equity $833,333.33 Less: Invested Capital (500,000.00) Pre-money value $333,333.33 Convertible Debt Post-money value of the firm's equity Less: Invested Capital Pre-money value $1,250,000.00 (500,000.00) $750,000.00 Convertible Preferred Stock Post-money value of the firm's equity Less: Invested Capital Pre-money value $1,111,111.11 (500,000.00) $611,111.11 d. When the EDITDA multiple increases, it increases the cost. For VC's it is best to exaggerate the EBITDA multiple size. to be conservative in the EBITDA multiple size. In case if the entrepreneurs are naturally optimistic about their firm's pr be more lenient or flexible to incorporate this into his deal-structuring considerations. e. The alternate source of financing includes Equity Financing, Debt Financing and Preferred stock financing. Among this posses the highest risk as well as highest return. The preferred stock equity financing is next to the equity which is less at the same time gives less returns than the equity financing. The debt finanicng is the least in terms of risk when comp patterns mentioned earlier. At the same time this gives the least returns when compared to the other two sourcing type Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output e the EBITDA multiple size. For entrepruneurs it is best timistic about their firm's prospects, then the VC must stock financing. Among this three Equity Financing xt to the equity which is less risky than the equity and t in terms of risk when compared to the other two the other two sourcing types. PROBLEM 11-5 Given Available gas (MCF) Price of Gas (today) Gas Price Next Year High Low Forward price for next year Development cost per MCF Debt (on the property) Interest rate on debt Debt maturity Asking price for Equity Risk free rate of interest Income tax rate Option Exercise price/MCF $ $ $ $ $ $ $ $ 50,000,000 14.03 per MCF 18.16 12.17 14.87 4.00 450,000,000 10% 1 year 50,000,000 6.0% 0.0% 13.90 Solution a. Hedging (with futures) analysis Revenue (hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income $ $ $ $ 743,500,000 (200,000,000) (45,000,000) 498,500,000 498,500,000 Less: Principal Payment Equity FCF $ $ (450,000,000) 48,500,000 $ Since there is only one Equity FCF (a sure value) and it is less than the $50 million asking price for the equity, the investment should not be made if the future oil revenue is going to be hedged. Estimated value of the equity $45,754,716.98 b. Real Option analysis Revenue (Not hedged) Less: Development cost Less: Interest expense EBT Less: Taxes Net Income Less: Principal Payment Equity FCF High Price for Gas $ 908,000,000 (200,000,000) $ (45,000,000) $ 663,000,000 $ $ 663,000,000 $ (450,000,000) $ 213,000,000 Low Price for Gas $ 608,500,000 (200,000,000) $ (45,000,000) $ 363,500,000 $ $ 363,500,000 $ (450,000,000) $ (86,500,000) Calculating the risk neutral probabilities High price oil Low price oil Risk Neutral Pbs Option Payout 45.1% $ 213,000,000 54.9% $ - Product 96,010,016.69 - Sum Risk Neutral Expected Equity FCF Equity Value $ $ 96,010,016.69 96,010,017 90,575,487 c. Valuing a Call Option on natural gas with an exercise price of 13.90 per MCF Option Payouts Risk Neutral Pb High price oil ($18.16/MCF) $ 4.26 45.1% Low price oil ($12.17/MCF) $ 54.9% Expected Payout Call Value Buy 50 m calls Product $ $ $ $ $ 1.92 1.92 1.81 90,575,487 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Present value of expected Equity FCF for year 1 where gas revenues are sold forward (hedged). Discounted at the risk free rate. Use forward price to calculate the risk neutral probability, i.e., The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the The option to produce only when conditions are favorable is obviously valuable. It doubles the value of the equity in the gas venture