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Question 1 Problem 1 - Using FCFE It is 12/31/15.  The following data have been accumulated from...

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?  

Solutions

Expert Solution

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.


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