Question $1$

An asset manager is valuing the listed company ES$30$Z with expected year$-$on$-$year growth

rate of sales as given in Table $1.$ Year $1$ is the company's first year of activity.

Table $1$

The EBIT margin $($as percentage of sales$)$ is expected to grow $25$ basis points $(0\mathrm{.}25\%)$ per

year between year $2$ and year $5.$ In year $1,$ the expected level of EBIT is $3,600$ with EBIT

margin of $5\%.$ Additional assumptions are:

Depreciation: $6\%$ of sales, all years

Recurrent Capex: $8\%$ of sales for year $1,$ with percentage decreasing $40$ basis

points per year until year $4$

Change in working capital: $9\%$ of yearly changes of EBIT

Tax rate: $20\%$

Target capital structure: debt$/($debt $+$ equity$)$ ratio of $60\%$

Asset beta: $1\mathrm{.}45$

Risk$-$free rate: $4\%$

Equity risk premium: $6\%$

Debt spread: $5\%$

To answer the following questions, make plausible assumptions if necessary.

a$.$ Compute the Free Cash Flows to the Firm $($FCF$)$ for the period from year $1$ until

year $5,$ including year $5.$ Round your computations to zero decimal places. Explain

your answer.

$[10$ marks$]$

b$.$ Given the set of assumptions reported below Table $1,$ what is the discount rate to

be used in this valuation exercise? Round your computations to two decimal places.

Explain your answer.

$[10$ marks$]$

c$.$ The company is expected to operate beyond year $5$ and the expected nominal

growth rate of FCF in perpetuity is $1\mathrm{.}85\%.$ The current market capitalization of the

company under analysis is $32,500$ and the expected net cash position at the end

of year $1$ is $2,500.$ Assume that there are no minority interests. What is the level of

financial investments $($at the end of year $1)$ above which the asset manager

investment recommendation is to BUY shares of the company under analysis

$($valuation at the end of year $1)?$ Explain your answer.

$[10$ marks$]$

d$.$ Consider the scenario in which the board of the company changes the estimated

target capital structure to $30\%.$ Will this impact the estimated FCF and the discount

rate? Explain your answer.

$[10$ marks$]$

e$.$ In the estimation of the equity value, an analyst should ignore the estimated value of

non$-$core non$-$current assets because they respect to non$-$core activities of the

company under analysis. Do you agree? Explain your answer.