Question
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 weighted average cost of capital (WACC)
2. Calculate the value of the firm using the discounted cash flow (DCF) analysis
3. 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.
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