Question

Question 1

Problem 1 - Using FCFE
It is 12/31/15.  The following data have been accumulated from analysis of Frank
Beamer Incorporated:
	1	2	3
	2016E	2017E	2018E
Annual FCFE	$         120,000	$      160,000	$          180,000
Given:
Net Debt	$         500,000
Shares Outstanding	200,000
Stock Price per share	$             15.00
Effective Tax Rate	30.0%
WACC	8.0%
Beta	1.10
Risk Free Rate	4.00%
Equity Risk Premium	6.00%
Terminal Growth Rate	5.0%
Calculate the Equity Value per Share for Frank Beamer Incorporated
as of 12/31/15 using the Free Cash Flows to Equity Approach.
Is the stock current over or under valued?
As you work through the problem, fill in the following numbers:
Show work for partial credit.
Frank Beamer cost of equity	10.600%
Frank Beamer WACC	8%
Terminal Value in 2018 (Gordon Growth)
Enterprise Value
Equity Value
Equity Value per Share
Stock over or under valued?

Question 2

Problem 1 - using FCFF
It is 12/31/15.  The following data have been accumulated from analysis of Frank
Beamer Incorporated:
	1	2	3
	2016E	2017E	2018E
Annual FCFF	$         120,000	$      160,000	$          180,000
Given:
Net Debt	$         500,000
Shares Outstanding	200,000
Stock Price per share	$             15.00
Effective Tax Rate	30.0%
WACC	8.0%
Beta	1.10
Risk Free Rate	4.00%
Equity Risk Premium	6.00%
Terminal Growth Rate	5.0%
Calculate the Equity Value per Share for Frank Beamer Incorporated
as of 12/31/15 using the Free Cash Flows to the Firm Approach.
Is the stock current over or under valued?
As you work through the problem, fill in the following numbers:
Show work for partial credit.
Frank Beamer cost of equity
Frank Beamer WACC	8%
Terminal Value in 2018 (Gordon Growth)
Enterprise Value
Equity Value
Equity Value per Share
Stock over or under valued?

Answer 1

1). Valuation using FCFE approach:

Cost of equity (ke) = risk-free rate + beta*risk premium = 4% + (1.10*6%) = 10.6%

	Year	2016E	2017E	2018E	2019 onwards
Formula	Time period (n)	1	2	3	Terminal
	Growth rate (g)				5%
	Annual FCFE	120,000	160,000	180,000	189,000
Terminal FCFE/(ke-g); ke = 10.60%, g = 5%	Terminal value in 2018				3,375,000
	Total FCFE	120,000	160,000	180,000	3,375,000
1/(1+ke)^n	Discount factor @ 8%	0.904	0.818	0.739	0.739
Total FCFE*Discount factor	PV of FCFE	108,499	130,801	133,048	2,494,643
	Total Equity value (TEV)	2,866,990
	Shares O/S (s)	200,000
(TEV/s)	Value per share ($)	14.33
	Net debt (D)	500,000
(TEV + D)	Enterprise value	3,366,990

Compared to the given stock price of $15, the intrinsic value per share is less so the stock is overvalued.

2). Valuation using FCFF approach:

	Year	2016E	2017E	2018E	2019 onwards
Formula	Time period (n)	1	2	3	Terminal
	Growth rate (g)				5%
	Annual FCFF	120,000	160,000	180,000	189,000
Terminal FCFF/(k-g); k = 8%, g = 5%	Terminal value in 2018				6,300,000
	Total FCFF	120,000	160,000	180,000	6,300,000
1/(1+k)^n	Discount factor @ 8%	0.926	0.857	0.794	0.794
Total FCFF*Discount factor	PV of FCFF	111,111	137,174	142,890	5,001,143
	Enterprise Value (EV)	5,392,318
	Less: Net debt (D)	500,000
(EV-D)	Equity value (TEV)	4,892,318
	Shares O/S (s)	200,000
(TEV/s)	Value per share	24.46

Compared to the given stock price of $15, the intrinsic value per share is much higher so the stock is undervalued.