Today is 31 December of 2019. You are thinking of investing in ABC Company. ABC is financed only with equity, but it doesn't have an opportunity to attract new capital via issue of additional shares. Book Equity value in 2019 was 200 mln. You also know the following financial information: Sales 600 mln., COGS 200 mln., SG&A 200 mln., DA 70 mln., Capex 65 mln, Accounts Receivable 100 mln., Accounts Payable 40 min. Free Cash Flow to Equity (FCFE) 20 mln. and is has been already distributed to shareholders. According to analysts, ABC's Earnings Before Interest Tax Depreciation and Amortization (EBITDA) are going to show the growth of 10% next year (in 2020), followed by 8% in 2021. After that the growth rate will be zero. Analysts predict that Depreciation and Amortization and Net Working Capital are going to grow with the same rate as EBITDA (always). Growth rate of Capex will be the same as the growth rate of EBITDA in 2020, 2021. Starting from 2022 Depreciation and Amortization will compensate Capex, so, they will be equal to each other. Marginal tax rate is 20%. Company distributes all FCFE as dividends. Assume that you believe that returns on that market are determined by two-factor APT model. Risk premiums of factors are 4% and 7%, risk-free rate is 2%. The sensitivities of Company ABC to factors one and two are -1 and 3. b) [3 points) Determine the required rate of return. c) [11 points) Build free cash flow table and use it to determine value of equity. d) [4 points) Determine ROE for years 2020, 2021 and 2022. What can you say about investment decisions of the company? What is the optimal policy if company wants to maximize the value of Equity? e) (3 points) It is a well-known fact that prices of Russian companies which pay high dividends fall during the crisis less than prices of companies that pay low dividends. Is it a direct violation of market efficiency? Today is 31 December of 2019. You are thinking of investing in ABC Company. ABC is financed only with equity, but it doesn't have an opportunity to attract new capital via issue of additional shares. Book Equity value in 2019 was 200 mln. You also know the following financial information: Sales 600 mln., COGS 200 mln., SG&A 200 mln., DA 70 mln., Capex 65 mln, Accounts Receivable 100 mln., Accounts Payable 40 min. Free Cash Flow to Equity (FCFE) 20 mln. and is has been already distributed to shareholders. According to analysts, ABC's Earnings Before Interest Tax Depreciation and Amortization (EBITDA) are going to show the growth of 10% next year (in 2020), followed by 8% in 2021. After that the growth rate will be zero. Analysts predict that Depreciation and Amortization and Net Working Capital are going to grow with the same rate as EBITDA (always). Growth rate of Capex will be the same as the growth rate of EBITDA in 2020, 2021. Starting from 2022 Depreciation and Amortization will compensate Capex, so, they will be equal to each other. Marginal tax rate is 20%. Company distributes all FCFE as dividends. Assume that you believe that returns on that market are determined by two-factor APT model. Risk premiums of factors are 4% and 7%, risk-free rate is 2%. The sensitivities of Company ABC to factors one and two are -1 and 3. b) [3 points) Determine the required rate of return. c) [11 points) Build free cash flow table and use it to determine value of equity. d) [4 points) Determine ROE for years 2020, 2021 and 2022. What can you say about investment decisions of the company? What is the optimal policy if company wants to maximize the value of Equity? e) (3 points) It is a well-known fact that prices of Russian companies which pay high dividends fall during the crisis less than prices of companies that pay low dividends. Is it a direct violation of market efficiency
