You are trying to estimate the intrinsic value of the shares of Flying High Ltd, a manufacturer of unmanned aerial vehicles, or drones. The company is headquartered in Melbourne, and sells its drones throughout Australian and New Zealand. It is a public company, but is not yet listed on the stock exchange. There are 40,000 shares outstanding.

question 1/

You have now received the firm's 2021 financial statements, which indicate that the after-tax cost of debt is 6.9% and the firm is financed 75% by debt. The corporate tax rate is 30%.

What is the firm's Weighted Average Cost of Capital (WACC)?

a.

12.57%

b.

11.54%

c.

9.99%

d.

11.02%

question 2/

Based on the 2021 financial statements, you calculate Free Cash Flow to the Firm in 2021 to have been $61,000, and you believe that this will grow at 3.2% in perpetuity.

The firm has just announced a restructure of its debt financing, As a result, the value of the firm's debt is now $288,000. This will change the firm's WACC. The WACC you calculated in the previous question was the historical WACC, but from now on the WACC will be 10.1% and this should be used for all valuation purposes.

What is the value of the firm using a Free Cash Flow Discount Model?

a.

$884058

b.

$963848

c.

$912348

d.

$973558

question 3/

The following information is unchanged from the previous question:

• The value of the firm's debt is now $288,000.
• The firm's WACC will be 10.1% for all valuation purposes.
• The firm's Free Cash Flow to the Firm in 2020 was $61,000.
• This is expected to grow at 3.2% in perpetuity.

What is the value of equity using a Free Cash Flow Discount Model?

a.

$624348

b.

$685558

c.

$596058

d.

$675848

question 4/

The following information is unchanged from the previous questions:

• The value of the firm's debt is now $288,000.
• The firm's WACC will be 10.1% for all valuation purposes.
• The firm's Free Cash Flow to the Firm in 2020 was $61,000.
• This is expected to grow at 3.2% in perpetuity.

What is the estimated share price using a Free Cash Flow Discount Model?

a.

$14.90

b.

$15.61

c.

$15.87

d.

$14.45

question 5/

Under what circumstances would you use the Residual Income Discount Model to value this stock?

a.

The dividend has been $2.74 every year for the past 10 years, even though cash flow has been negative for that period of time and is expected to continue to be negative for the foreseeable future.

b.

The dividend varies from year to year. It is sometimes zero and sometimes positive, even though cash flow has been negative for the past 10 years and is expected to continue to be negative for the foreseeable future.

c.

The dividend varies from year to year. It is sometimes sometimes positive, but sometimes there is no dividend, even though cash flow has been positive for the past 10 years and is expected to continue to be positive for the foreseeable future.

d.

The dividend has been $2.74 every year for the past 10 years, and cash flow has been positive for that period of time and is expected to continue to be positive for the foreseeable future.

question 6/

The firm's 2021 financial statements indicate that the total book value of equity as at 31 December 2021 was $1093600, and therefore BV per share was $27.34.

You have come up with the following forecasts for 2022:

• EPS for 2021 is expected to be $7.34.
• The dividend per share in 2022 is expected to be the same as in 2021.

What is the residual income per share expected to be in 2022?

a.

$0.55

b.

$0.47

c.

$0.37

d.

$0.60

question 7/

Book value of equity, per share, as at 31 December 2021 was $27.34.

You have come up with the following forecasts:

• Earnings are expected to grow at 3.2% in perpetuity.
• The firm's Return on Equity is expected to remain constant at 29.94%.

What is the estimated value of the shares using a Residual Income Discount Model?

a.

$32.81

b.

$35.14

c.

$33.84

d.

$34.60