XYZ develops computer products for consumers. In June 2013, a team of analysts issued a research report that valued XYZ's stock at $7.89 per share, compared to the then-current market price of $10. The research report's discounted cash flow valuation table is reproduced below. The 2013 figures are as reported by XYZ, but the 2014 through 2021 figures are analysts' forecasts. Key assumptions include a weighted average cost of capital of 13%, cost of equity 8% and a perpetual growth rate of 1%. All dollar amounts are in millions except share value. Analyst Forecast 2017 Actual 2013 2014 2016 2018 2019 2020 2021 2015 186.3 Total Revenues: 120 130 218.1 239.2 280.5 315.2 363.2 410.3 EBITDA 6 9 16 28 35 69 76.5 113.1 145.4 Capital expenditures -0.6 -1.9 -2.1 -2.4 -3.9 -6 -7.2 -9.3 -8.5 Cash taxes -1.8 -2 -3 -9.8 -2.9 -5.6 -6.6 -11.5 -15.1 Free cash flow 3.6 5.1 10.9 15.8 28.2 57.4 62.7 92.3 121.8 Discount factor: Present value 0.884956 0.783147 0.69305 0.613319 0.54276 0.480319 0.425061 0.37616 4.513274 8.536299 10.95019 17.29559 31.15442 30.11597 39.2331 45.81627 385.6203 Present value beyond 2021 Present value 2014-2021 187.6151 573.2354 Less net debt 60.1 Equity value 513.1354 65 Shares ourstanding Share value 7.894391 Required: 5, Why does the analyst team subtract an amount for net debt in arriving at Equity value? (Note: The term net debt is defined for spreadsheet purposes as financial liabilities (e.g., loans) minus any financial assets (e.g., money market investments)) (2 marks) 6, What share value estimate would the XYZ have calculated if they had used an abnormal earnings value approach rather than a discounted cash flow approach and had developed forecasts of abnormal earnings and book values that were consistent with the cash flow forecast in the above worksheet? Why? (3 marks) 7, Sometimes analysts' research reports contain inadvertent computational errors. What would the estimated value of XYZ's stock have been if the analysts mistakenly used 56 million shares outstanding rather than the correct 65 million share count? (2 marks) XYZ develops computer products for consumers. In June 2013, a team of analysts issued a research report that valued XYZ's stock at $7.89 per share, compared to the then-current market price of $10. The research report's discounted cash flow valuation table is reproduced below. The 2013 figures are as reported by XYZ, but the 2014 through 2021 figures are analysts' forecasts. Key assumptions include a weighted average cost of capital of 13%, cost of equity 8% and a perpetual growth rate of 1%. All dollar amounts are in millions except share value. Analyst Forecast 2017 Actual 2013 2014 2016 2018 2019 2020 2021 2015 186.3 Total Revenues: 120 130 218.1 239.2 280.5 315.2 363.2 410.3 EBITDA 6 9 16 28 35 69 76.5 113.1 145.4 Capital expenditures -0.6 -1.9 -2.1 -2.4 -3.9 -6 -7.2 -9.3 -8.5 Cash taxes -1.8 -2 -3 -9.8 -2.9 -5.6 -6.6 -11.5 -15.1 Free cash flow 3.6 5.1 10.9 15.8 28.2 57.4 62.7 92.3 121.8 Discount factor: Present value 0.884956 0.783147 0.69305 0.613319 0.54276 0.480319 0.425061 0.37616 4.513274 8.536299 10.95019 17.29559 31.15442 30.11597 39.2331 45.81627 385.6203 Present value beyond 2021 Present value 2014-2021 187.6151 573.2354 Less net debt 60.1 Equity value 513.1354 65 Shares ourstanding Share value 7.894391 Required: 5, Why does the analyst team subtract an amount for net debt in arriving at Equity value? (Note: The term net debt is defined for spreadsheet purposes as financial liabilities (e.g., loans) minus any financial assets (e.g., money market investments)) (2 marks) 6, What share value estimate would the XYZ have calculated if they had used an abnormal earnings value approach rather than a discounted cash flow approach and had developed forecasts of abnormal earnings and book values that were consistent with the cash flow forecast in the above worksheet? Why? (3 marks) 7, Sometimes analysts' research reports contain inadvertent computational errors. What would the estimated value of XYZ's stock have been if the analysts mistakenly used 56 million shares outstanding rather than the correct 65 million share count? (2 marks)