A private equity investor is studying the company HELLO to make an investment decision. The investor's estimates for Free Cash Flows to Firm (FCF), levels of debt and net Financial Expenses (FE) of the company are presented in Table 1.

Table 1

	Year 2021	Year 2022	Year 2023	Year 2024	Year 2025	Year 2026
FCF	-	€11,200	€12,890	€13,800	€14,760	€15,300
Level of debt	€2,000	€2,200	€2,800	€1,790	€2,250	€2,500
FE	-	€120	€145	€135	€120	€132

Additionally, the investor has made the following assumptions: (i) risk-free interest rate: 3%; (ii) target capital structure: debt/(debt + equity) ratio of 55%; (iii) equity risk premium: 6%; (iv) asset beta: 1.15; and (v) tax rate: 20%. The number of shares of the company is 23000 and the current market price of HELLO is €5.2 per share.

To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g., b rather than β, capital_sigma rather than ∑).

1. Compute the yearly Equity Free Cash Flows (EFCF) for the period from 2022 until 2026. Explain your answer.

[15 marks]

2. Assume the expected nominal growth rate of the EFCF in perpetuity is 1.75%. Calculate the expected equity value of HELLO at year-end 2022. Present your result rounded to one decimal place. Explain your answer.

[15 marks]

3. Considering the current market price of the company, what would be the investment decision of the investor? Present your result rounded to one decimal place. Explain your answer.

[10 marks]

4. Consider the following statement: “The Capital Cash Flow is a cash flow metric not directly reflecting financing decisions and with an equity perspective”. Do you agree with this statement? Explain your answer.

[10 marks]

Answer rating: 100% (QA)

a EFCF FCF FE EFCF 11200 120 11320 EFCF 12890 145 12745 EFCF 13800 135 13... View the full answer