Question

In: Finance

Meatball is preparing a valuation of Space Force Inc (SFI) using a multiple-stage FCFE valuation model...

Meatball is preparing a valuation of Space Force Inc (SFI) using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $1.25. The FCFE is expected to grow at 12 percent for the next four years, then at 8 percent annually for the following three years, and finally at a constant growth rate of 5 percent starting the eighth year. SFI’s estimated beta is 1.15, and Meatball believes that the current market conditions dictate a 2.50% risk free rate and a 12% expected market return. The following are five independent questions.

a) Given Meatball’s assumptions and approach, estimate the value of a share of SFI.

b) If the terminal growth rate is projected to be 6%, rather than 5%, re-estimate the value of a share of SFI. Does this new estimate make sense?

c) If the expected market return is assumed to be 9%, rather than 12%, re-estimate the value of a share of SFI. Does this new estimate make sense?

d) If the systematic risk coefficient (beta) of the stock increases from 1.15 to 1.40, re-estimate the value of a share of SFI. Does this new estimate make sense?

e) If SFI’s estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of SFI. Assume SFI's bonds outstanding are traded at a yield of 6.45% and the risk premium required for SFI’s equity shareholders over bond holders is 4.25%.

Solutions

Expert Solution

a.

cost of equity, Ke 13%
Years 0 1 2 3 4 5 6 7 8
Cash flows 1.25 1.4 1.568 1.75616 1.966899 2.124251 2.294191 2.477727 30.87968
PV 1.23429579 1.218789 1.203477 1.188357 1.131519 1.0774 1.025869 11.27204
value at the end of 0 19.3517447

b.

cost of equity, Ke 13%
Years 0 1 2 3 4 5 6 7 8
Cash flows 1.25 1.4 1.568 1.75616 1.966899 2.124251 2.294191 2.477727 35.03856
PV 1.23429579 1.218789 1.203477 1.188357 1.131519 1.0774 1.025869 12.79016
value at the end of 0 20.8698643

c.

cost of equity, Ke 10%
Years 0 1 2 3 4 5 6 7 8
Cash flows 1.25 1.4 1.568 1.75616 1.966899 2.124251 2.294191 2.477727 52.29373
PV 1.27301659 1.296457 1.320329 1.344641 1.320493 1.296778 1.27349 24.43981
value at the end of 0 33.5650141

d.

cost of equity, Ke 16%
Years 0 1 2 3 4 5 6 7 8
Cash flows 1.25 1.4 1.568 1.75616 1.966899 2.124251 2.294191 2.477727 24.08901
PV 1.208981 1.169308 1.130937 1.093825 1.020148 0.951433 0.887347 7.4499
value at the end of 0 14.9118788

e.

new discount rate = 6.45%+4.25%= 11%

cost of equity, Ke 11%
Years 0 1 2 3 4 5 6 7 8
Cash flows 1.25 1.4 1.568 1.75616 1.966899 2.124251 2.294191 2.477727 45.64233
PV 1.26467931 1.279531 1.294557 1.30976 1.277814 1.246648 1.216242 20.2389
value at the end of 0 29.128129

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

BIOMET VALUATION PROBLEM Three-Stage FCFE Model Biomet Inc., designs, manufactures and markets reconstructive and trauma devices,...
BIOMET VALUATION PROBLEM Three-Stage FCFE Model Biomet Inc., designs, manufactures and markets reconstructive and trauma devices, and reported earnings per share of $0.56 in 1993, on which it paid no dividends. (It had revenues per share in 1993 of $2.91). It had capital expenditures of $0.13 per share in 1993 and depreciation in the same year of $0.08 per share. The working capital was 60% of revenues in 1993 and will remain at that level from 1994 to 1998, while...
(DDM-Three stage Model Question) Cathy Evert has been given the assignment of preparing a business valuation...
(DDM-Three stage Model Question) Cathy Evert has been given the assignment of preparing a business valuation of ABC LTD. The following information was collected: High Growth Stage Stable Growth Stage Return on Assets 19% 4% Payout 35% 59% Debt Ratio 0.20 0.65 Length 2 Years Indefinite Beta 1.05 0.90 Evert expects the high growth period to phase into the stable growth period evenly over a 2 year period before reaching stable growth in Year 5. The 20 year government bond...
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has...
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has collected the following information (currency in euros): • Phaneuf has net income of €250 million, depreciation of €90 million, capital expenditures of €170 million, and an increase in working capital of €40 million. • Phaneuf will finance 40 percent of the increase in net fixed assets (capital expenditures less depreciation) and 40 percent of the increase in working capital with debt financing. • Interest...
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has...
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has collected the following information (currency in euros): • Phaneuf has net income of €250 million, depreciation of €90 million, capital expenditures of €170 million, and an increase in working capital of €40 million. • Phaneuf will finance 40 percent of the increase in net fixed assets (capital expenditures less depreciation) and 40 percent of the increase in working capital with debt financing. • Interest...
10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic...
10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood...
Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value...
Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency...
So called “H-Model” in stock valuation is a variant of the following model. 3-stage dividend discount...
So called “H-Model” in stock valuation is a variant of the following model. 3-stage dividend discount model (DDM) 2-stage DDM the Gordon model
Advantages of using 2-stage Discount cash flow valuation compared to other valuation method .(10 marks)
Advantages of using 2-stage Discount cash flow valuation compared to other valuation method .
Compare and contrast the valuation of stocks using the residual income valuation model and the abnormal...
Compare and contrast the valuation of stocks using the residual income valuation model and the abnormal earnings growth model
Valuation Using Price-to-NOPAT Multiple The following table provides summary data for Applied Materials Inc. and its...
Valuation Using Price-to-NOPAT Multiple The following table provides summary data for Applied Materials Inc. and its competitors, KLA Tencor Corporation and Lam Research Corporation. (in millions) Applied Materials KLA Tencor Lam Research Company assumed value - $9,791 $11,530 Equity assumed value - $8,988 $13,245 NOPAT $1,444 $440 $674 Net income $1,377 $366 $656 Net nonoperating obligations (assets) $(1,369) $803 $(1,715) Common shares outstanding 1,160.0 157.9 158.5 a. Compute the price to NOPAT ratio for both KLA Tencor Corporation and Lam...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT