8.) a) Consider the valuation methods learned in this course. Explain the advantages of using the abnormal operating income based method when valuing the shares of companies in the same industry with very different leverage. (3 marks) b) Chudleigh's reformulated financial statements are shown below. Its financial year is the calendar year. Its weighted average cost of capital is 7.25%. NZD million 2021 2020 Intangible assets 9,749 9,178 Property, plant and equipment 6,628 6,118 Inventory 4,222 4,181 Operating liabilities 6,526 6,116 Financial assets 200 225 Interest-bearing debt 4,075 4,916 Common shareholders' equity 10,198 8,670 NZD million 2021 Net sales 14,800 Operating expenses 7,610 Depreciation 1430 Net interest expense 300 Taxation 1800 Profit for the year 3,660 (i) Calculate Chudleigh's free cash flow and abnormal operating income in 2021, (5 marks) pens 7,610 Depreciation 1430 Net interest expense 300 Taxation 1800 Profit for the year 3,660 (i) Calculate Chudleigh's free cash flow and abnormal operating income in 2021. (5 marks) (ii) Assuming the growth rates of free cash flow and abnormal operating income shown below, calculate the intrinsic value of Chudleigh's equity at the end of 2021 (to the nearest NZD million) using: the free cash flow based valuation method, and the abnormal operating income based valuation method. Growth rates (%) 2022 2023 2024 Post horizon Free cash flow 4% 3% 2% 1% Abnormal operating income 6% 3% 1% 0% (10 marks) (iii) Why would it be wrong to assume the same post horizon growth rates for free cash flow and abnormal operating income? (3 marks) 4 c) Explain briefly the trading strategy tested by Teoh, Welch and Wong (1998) around initial public offerings. (4 marks) END OF PAPER