You are a senior financial analyst of a firm based in Melbourne. You have been assigned with
Question:
You are a senior financial analyst of a firm based in Melbourne. You have been assigned with the task of training interns who recently joined your firm on how to use the free cash flow model to estimate the value of a company. You have collected data on the following data:
The long-term debt in 2020 was $58000. The company plans an annual compound growth of 5% for the long-term debt. The working capital of the company in 2020 was $15,000. The company plans an
annual compound growth of 6% for the working capital. Using the information you have collected above, perform calculations to explain to interns as to how the following are calculated:
i. Free cash flow to firm
ii. Free cash to equity
iii. Value of the firm according to the free cash flow to firm method
iv. Value of the firm according to the free cash flow to equity method
v. Estimated price of an equity share according to the free cash flow to firm method and the free cash flow to equity method
A company must make a payment of $25,937 in 10 years. The market interest rate is 10%. The company's portfolio manager wishes to fund the obligation using four-year zero-coupon bonds and perpetuities paying annual coupons.
How can the manager immunize the obligation?
Suppose that three years have passed, and the interest rate remains at 10%. Is the position still fully funded? Is it still immunized? If not, what actions are required?