Assume there is index of the vacation cruise industry. Assume further that its value decreased due...

Assume there is index of the vacation cruise industry. Assume further that its value decreased due to the COVID-19 to $1800 per share, which represents about 30% of its end of 2019 value. The industry is not expected to fully recover this year and expected FCF per share will be -$80 in 2020, $140 in 2021 and grows at a constant annual rate of 5% thereafter. The appropriate discount rate to value the index is 12%. a) should an investor long or short this index? Show work. b) what minimum growth rate in FCF beyond 2021 would warranty longing this index?

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Expert Solution

Value of stock = present value of next 2 years FCF + present value of terminal value at end of 2 years

Terminal value at end of 2 years = Year 2 FCF * (1 + growth rate after 2 years) / (discount rate - growth rate after 2 years)

Present value = future value / (1 + required return)^{number
of years}

Value of index today = $1,714.29

An investor should short the index as the actual market value is higher than the value calculated above.

To long the index, the value calculated above should be higher than the market value of $1,800.

We use GoalSeek in Excel to find the growth rate at which the value of the index is at least $1,801.

To warrant longing the index, the minimum growth rate should be 5.32%

jeff jeffy answered 1 year ago

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