Question: i want the answer for d and e Question 1 An equity analyst is valuing a listed company that is expected to generate EBIT from

i want the answer for d and e

Question 1 An equity analyst is valuing a listed company that is expected to generate EBIT from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 10000 12500 12850 13750 14800 The EBIT margin is expected to be stable at 10.2% of sales from year 2 until year 5. The expected level of sales for year 1 is 130000. Additional assumptions are: Depreciation: 5% of sales, all years Recurrent Capex: 7% of sales for year 1, with percentage decreasing 55 basis points (0.55%) per year until year 4 Change in working capital: 10% of yearly changes of EBIT Tax rate: 20% Target capital structure: debt (debt + equity) ratio of 40% Asset beta: 1.25 Risk-free rate: 2.5% Equity risk premium: 6% Debt spread: 3% Expected level of interest bearing debt at end of year 1: 20000 Expected level of cash at the end of year 1: 7500 a) Compute the Free Cash Flows to the Firm (FCF) for the period from year 1 until year 5, including year 5. Explain your answer. [10 marks] b) It is often recognised that there exists an optimal capital structure (debt versus equity), that maximises the value of the company. Explain why, up until a certain level of debt. more debt increases the value of the company and, above that level, increases in debt destroys value (everything else being constant). [10 marks) c) Given the target capital structure and the set of assumptions reported in Table 1, what is the discount rate to be used in this valuation exercise? Explain your answer. [10 marks) "Continues on next page..." ECOM118 (2020) Page 3 d) The expected nominal growth rate of FCF in perpetuity is 1.25%. What is the expected value of the company at the end of year 1? Explain your answer. (10 marks) e) The current market capitalization of the company under analysis is 105000. What would be the equity analyst investment recommendation? Explain your answer. [5 marks) ECOM118 (2020) Page 3 d) The expected nominal growth rate of FCF in perpetuity is 1.25%. What is the expected value of the company at the end of year 1? Explain your answer. (10 marks) e) The current market capitalization of the company under analysis is 105000. What would be the equity analyst investment recommendation? Explain your answer. [5 marks)

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

-3% Question 1 An equity analyst is valuing a listed company with expected year-on-year growth rate of sales as given in Table 1. Table 1 Year 2 Year 3 Year 4 Year 5 +4% +2% +1% The EBIT margin (as...

Question 1 An equity analyst is valuing a listed company with expected year-en-year growth rate of sales as given in Table 1 Table 1 Year 2 Year 3 Year 4 Year 5 3% +2% The EBIT margin (as percentage...

Question 1 An equity analyst is valuing a listed company that is expected to generate EBIT from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 16000 18200 16480 17100...

Compute the Free Cash Flows to the Firm (FCF) for the period from year 1 until year 5, including year 5. Explain your answer. Question 1 An equity analyst is valuing a listed company that is expected...

A private equity analyst is valuing a company that is expected to generate sales from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 45,000 52,000 57,500 62,500 68,800...

Question 1 A private equity analyst is valuing a company that is expected to generate sales from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 45,000 52,000 57,500...

I have completed qn 1(a),(b) and (c), but i need help in answering qn1(d) and 1(e). I have uploaded the guidelines and expections of the question 1 (d) and (e) Question 1 Bouvardia S.A. is equity...

A private equity analyst is valuing a company that is expected to generate sales from year 1 onwards as given in Table 1. Year 1 45,000 Year 2 52,000 Table 1 Year 3 57,500 Year 4 62,500 Expected...

An Industrial Park is available for sale for $2,000,000. It is estimated that the investment will produce $200,000 per year for the next 10 years. At the end of 10 years the property will be sold for...

First City Financial Corp., a Canadian company controlled by the Belzberg family, was engaged in the business of investing in publicly held American corporations. Marc Belzberg identified Ashland Oil...

An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of the audit committee, except Services that the...

Questions Q1. Write a Python program to retrieve the first and last colors from the following list: color_list = ["red", "green", "white", "blue", "black") Q2. Given the following dictionary,...

4. How does the leverage ratio influence a financial institutions stability in response to bad economic news?

1. Explain the difference between debt finance and equity finance.

6. A central bank typically acts as a lender of last resort when a bank a. reports that its capital has fallen below zero. b. does not have the liquidity to meet depositors withdrawals. c. stops...