Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

question 1 You have recently started as an equity analyst at a large American bank. Your first task is to make a report on the

question 1

You have recently started as an equity analyst at a large American bank. Your first task is to

make a report on the Company A. The company distributes free

local newspapers in USA. From your initial analysis, you have made the following

forecast (all in million $):

Forecasts (million $, rounded to two decimals)

2022

2023

2024

Sales

30.00

28.00

25.00

Operating expenses

26.50

25.00

22.30

Depreciation

0.50

0.20

0.20

EBIT

3.00

2.80

2.50

Interest expenses

2.00

2.00

2.00

Tax

0.23

0.18

0.11

Net income

0.78

0.62

0.39

Capital expenditures

5.00

1.00

1.00

Net working capital

8.00

7.00

6.00

Assume that the first cash flow in column 2022 comes in one year from now, that the

growth rate in free cash flow from 2024 is 0% and that net working capital in 2021 is 10

million $.

Assume further that the risk-free rate is 2%, the expected return on the market is 5% and

that the corporate tax rate is 22.5%.

The companys cost of equity is 11%, the beta on equity is 3, the beta on debt is 0.5 and that

the company maintains a constant debttoequity ratio of 2.

State additional assumptions if needed.

Answer the following questions:

1. Calculate the asset beta of Company A and discuss what the magnitude can tell us about

the company

2. Calculate the free cash flows

3. Calculate the pretax cost of debt

4. Explain one other possible method of estimating the pretax cost of debt

5. Calculate the weighted average cost of capital (WACC)

6. Calculate the value of the firm using the discounted cash flow (DCF) analysis

7. Make a scenario analysis of your valuation as follows. Consider two scenarios. The

first scenario has a growth rate of free cash flows of 2% (and the same WACC). The

second scenario has a growth rate of 2% and a WACC of 7%. Compute the firm value

in each of these alternative scenarios and discuss reasons for doing this scenario

analysis.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Islamic FinanceA Practical Perspective

Authors: Nafis Alam, Lokesh Gupta, Bala Shanmugam

1st Edition

3319665588, 9783319665580

More Books

Students also viewed these Finance questions