You are valuing Atria Bank using the Free Cash Flow to Equity approach for banks. At...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are valuing Atria Bank using the Free Cash Flow to Equity approach for banks. At the end of Year 0, Atria had total assets of $6 billion and common equity of $630 million. In Year 0, net income was $70 million. You assume a high growth period of 2 years in which total assets will grow at 4% per year. In Year 3 and thereafter, the bank will reach a steady state, and net income will grow at a constant rate of 1% forever. Other assumptions are as follows: Capital Ratio ROE Year 1 10.4% 11.0% Year 3 and thereafter 10.2% Year 2 10.2% 10.5% 10.5% Capital Ratio = Yearend Common Equity/ Yearend Total Assets ROE = Net Income/Yearend Common Equity Risk free rate is 4%. Mature Market Risk Premium is 5.1%. Since Atria also operates in emerging markets, the country risk premium applicable to Atria Bank is 1.4%. Tax rate is 25%. The beta for the banking industry is 1. Atria Bank has 40 million shares outstanding. a. Estimate the free cash flow to equity in Year 1 and Year 2. [2 points] b. Estimate the terminal value at the end of Year 2. [1 point] c. Estimate the intrinsic value per share. [1 point] You are valuing Atria Bank using the Free Cash Flow to Equity approach for banks. At the end of Year 0, Atria had total assets of $6 billion and common equity of $630 million. In Year 0, net income was $70 million. You assume a high growth period of 2 years in which total assets will grow at 4% per year. In Year 3 and thereafter, the bank will reach a steady state, and net income will grow at a constant rate of 1% forever. Other assumptions are as follows: Capital Ratio ROE Year 1 10.4% 11.0% Year 3 and thereafter 10.2% Year 2 10.2% 10.5% 10.5% Capital Ratio = Yearend Common Equity/ Yearend Total Assets ROE = Net Income/Yearend Common Equity Risk free rate is 4%. Mature Market Risk Premium is 5.1%. Since Atria also operates in emerging markets, the country risk premium applicable to Atria Bank is 1.4%. Tax rate is 25%. The beta for the banking industry is 1. Atria Bank has 40 million shares outstanding. a. Estimate the free cash flow to equity in Year 1 and Year 2. [2 points] b. Estimate the terminal value at the end of Year 2. [1 point] c. Estimate the intrinsic value per share. [1 point]
Expert Answer:
Answer rating: 100% (QA)
a Year 0 Net Income 70 million Year 1 Change in Common Equity Year 1 Common Equity Year 0 Common Equ... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
Posted Date:
Students also viewed these finance questions
-
Match each concept to the corresponding example. Drag each item on the left to its matching item on the right. transnational nongovernmental organizations cultural hybridization transnational...
-
Mr Hadi was a founder of business that specializes in the healthy and wellness living industries. His business has been established in the market since mid 2000 as a privately owned company. The...
-
The Coca-Cola Company is a global soft-drink beverage company that is a direct competitor with Starbucks. The data in Chapter 12, Exhibits 12.14 through 12.16 (pages 806-809), include the actual...
-
Using Figure 11.25 and the related text, describe the features of terracing, and list the major alterations to soil and water brought about by this agricultural method. Figure 11.25
-
Suppose that, when the offense calls a running play, they gain an average of 1 yard if the defense anticipates a running play, and gain an average of 3 yards if the defense anticipates a passing...
-
A parallel helical gearset consists of a 19-tooth pinion driving a 57-tooth gear. The pinion has a left-hand helix angle of 30, a normal pressure angle of 20, and a normal module of 2.5 mm. Find: (a)...
-
What is the purpose of an RFP?
-
The standard cost of Product B manufactured by Pharrell Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of...
-
Brittany is 2 7 years old, has one daughter who is blind, and files as Head of Household. What is the Standard deduction?
-
A slipper-pad bearing (Fig. P1023) is often encountered in lubrication problems. Oil flows between two blocks; the upper one is stationary, and the lower one is moving in this case. The drawing is...
-
Find the price for the bond in the following table: Par Value Coupon Rate Years to Maturity Yield to Maturity Price $5,000.00 11% 5 9% $
-
Select any company or organization, and write a brief summary of its best communication practices. How can you apply these practices to your study of communication and to your professional career?
-
Explain the difference between task roles and relationship roles.
-
Define organizational culture.
-
A(n) _____________ is a one- or two-sentence declarative statement about your career goals.
-
Explain the foundations of Communication Privacy Management theory.
-
Assume the required return is 10%. What is the project's NPV? A) $ 887 B) $13,322 C) $22,759 D) $30,024 E) $45,001
-
The financial statements of Eastern Platinum Limited (Eastplats) are presented in Appendix A at the end of this textbook. Instructions (a) Does East plats report any investments on its statement of...
-
How do corporate taxes affect the decision of a firm to retain excess cash?
-
What do you need to know to compute a cash flow's present or future value?
-
What advantages does a stock market provide to corporate investors?
-
The criterion of phase equilibrium of a component is (a) \(d G_{T, P, V}=0\) (b) \(d G_{T, P}=1\) (c) \(d G_{T, P}=0\) (d) \(d A_{T, P}=0\).
-
The bubble point and dew point curves meet where the mixture turns into (a) Purely two components (b) Purely one component (c) Purely three components (d) None of these.
-
The term azeotrope means (a) Condensing without changing (b) Boiling without changing (c) Both (a) and (b) (d) Neither (a) nor (b).
Study smarter with the SolutionInn App