Question 2: (1) You have been asked to value Dexia Financials, a small, high growth firm, and are told that Dexia generated 150 million in net income in the most recent year on a book value of equity of 750 million; the book value of assets is 5 billion right now and capital ratio is 15% (capital ratio-book value of equity/assets). a. Dexia expects its assets and net income to grow 10% a year for the next five years and plans to increase its capital ratio to 20% of assets by the end of year 5 (with the ratio changing in equal annual increments over the five years). Estimate the free cash flows to the equity of Dexia each year for the next 5 years. (30 marks) b. After year 5, Dexia expects to be a mature firm, growing 3% a year in perpetuity, while continuing to earn the return on equity that it had at the end of year 5. If the cost of equity for mature firm is 9%, estimate the value of equity at the end of year 5. (20 marks) c. If Dexia expects to have a cost of equity of 12% for the next 5 years, estimate the value per share, assuming that Dexia has 50 million shares today. (10 marks) (2) There are two approaches to valuation. The first approach is to value the equity in the firm. The second approach is to value the entire firm. a. What is the distinction? b. Why does the distinction matter? (20 marks) (20 marks)