Currently GM has Capital Expenditures (CAPX) equal to $7823 million, operating working capital of $8276 million (equal

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Question:

Currently GM has Capital Expenditures (CAPX) equal to $7823 million, operating working capital of $8276 million (equal to the 2020 level), and depreciation of $7823 million. Interest costs in 2021 were $12,420 million. GM has a cost of equity of 15% and a cost of debt of 9%, moreover, their capital structure is 66.6667% debt and 33.3333% equity. The tax rate is 21%. GM currently has 4 billion shares trading at $17.25/shr and $138 billion of Long Term (LT) debt rated BB. The consensus of analysts' forecasts project GM's FCFF to grow at 7.6% for the next 2 years before settling into a steady state with growth of 2.8% per year forever.

a) Estimate a value for GM at the end of 2021 based on the consensus forecast. Use the WACC approach.

b) As an analyst for the Super Cool Investment Corp (SCIC) your view differs from the consensus. Specifically, though you agree with the consensus of 7.6% growth in GM's FCFF in the near term, you expect terminal value (TV) of 13X terminal (2023) cash flow. Would you issue a buy, sell, or hold recommendation to portfolio managers at VCIC? Explain. Your explanation must utilize another valuation based on the TV multiplier.

c) Assuming that GM intends to maintain its Debt-to-Value (D/V) ratio at 2/3, re-work your valuation of GM from Part (a) using the Adjusted Present Value (APV) approach, and explain why your valuation does or doesn't match your WACC valuation in Part (a).

d) Sticking with the auto industry, the Electric Car Company (ECC) is a relatively new entrant in the electric vehicle industry hoping to eventually compete successfully with Tesla (TSLA), NIO, and Rivian (RIVN). It is now the end of 2021 and ECC is in need of a round of VC capital. ECC's team is forecasting sales 2 years hence (2023) of $25,000,000, at which point they hope to go public. NIO and RIVN are thought to be the best comparables in terms of business risk and growth opportunities. NIO and RIVN are both all-equity financed and trading at 14X sales and 12X sales, respectively. ECC approaches Electric Vehicle Ventures (EVV) about investing $10,000,000 for 1,000,000 shares. There are currently 9,000,000 shares of ECC outstanding. Should EVV be willing to invest $10,000,000 for 1,000,000 shares if they require a return of 60% and also anticipate further dilution of 25% in additional VC funding and another 8% sold at the IPO? What is the minimum number of shares they should accept in exchange for $10,000,000? (Note: make sure you justify your answers)