Question 2 - Pixelworks Value Pixelworks has been working on advanced media tracking technology, which will be available for commercialization in a short period. If they don't invest in the project, they expect to grow at a 4 percent rate in perpetuity, starting from year-end T1 forward. It pays out all earnings as dividends. Their forecast of next year's revenues are $11.25 million; and earnings after tax are forecast at $2.81m If the invest in a new product line, they anticipate the first after tax cash flow from the technology to be $3.75 million, received one year from today. Market demand is expected to result in cash flow growth at a 30% rate for two years after that. Thereafter, competitive pressures are expected to reduce long run growth to 5 percent growth, in perpetuity. Pixelworks expects to invest $55.75 million in the venture immediately to secure these future cash flows. Pixelworks has a YTM on its debt of 6.5%; Pixel works does not have a reliable beta, but it know that firms in this industry have asset betas of 1.30. Market conditions are such that the risk free rate is 3.5% and the market risk premium is 5.0%. The company has $25 million in debt and a market value of equity of $85 million. It has 3.0 million shares outstanding and faces a tax rate of 25%. Show all steps and inputs to your final answer. If needed, use the non-tax version of beta (ie Asset beta = Bequity/(1+D/E)) a. What is the discount rate that should be used for the valuation? b. What is the value of the company WITHOUT the project? The price per share? Assume all cash flows are received at year's end. c. What is the value of the project as a Stand-Alone in total? What is the value of the project investment on a per-share basis? d. What is the new price per share of Pixelworks if they undertake the investment? What is your recommendation regarding the proposed investment - accept or reject? Question 2 - Pixelworks Value Pixelworks has been working on advanced media tracking technology, which will be available for commercialization in a short period. If they don't invest in the project, they expect to grow at a 4 percent rate in perpetuity, starting from year-end T1 forward. It pays out all earnings as dividends. Their forecast of next year's revenues are $11.25 million; and earnings after tax are forecast at $2.81m If the invest in a new product line, they anticipate the first after tax cash flow from the technology to be $3.75 million, received one year from today. Market demand is expected to result in cash flow growth at a 30% rate for two years after that. Thereafter, competitive pressures are expected to reduce long run growth to 5 percent growth, in perpetuity. Pixelworks expects to invest $55.75 million in the venture immediately to secure these future cash flows. Pixelworks has a YTM on its debt of 6.5%; Pixel works does not have a reliable beta, but it know that firms in this industry have asset betas of 1.30. Market conditions are such that the risk free rate is 3.5% and the market risk premium is 5.0%. The company has $25 million in debt and a market value of equity of $85 million. It has 3.0 million shares outstanding and faces a tax rate of 25%. Show all steps and inputs to your final answer. If needed, use the non-tax version of beta (ie Asset beta = Bequity/(1+D/E)) a. What is the discount rate that should be used for the valuation? b. What is the value of the company WITHOUT the project? The price per share? Assume all cash flows are received at year's end. c. What is the value of the project as a Stand-Alone in total? What is the value of the project investment on a per-share basis? d. What is the new price per share of Pixelworks if they undertake the investment? What is your recommendation regarding the proposed investment - accept or reject
