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    Tutorial 12: Valuation of Companies

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    Tutorial 12: Valuation of Companies

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    stella
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    CF T12

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    4 views9 pages

    Tutorial 12: Valuation of Companies

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    stella

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    Tutorial 12

    VALUATION OF COMPANIES
    1. IDX Technologies is a privately held developer of advanced security
    systems based in Chicago. As part of your business development
    strategy, in late 2008 you initiate discussions with IDX’s founder about
    the possibility of acquiring the business at the end of 2008. Estimate
    the value of IDX per share using a discounted FCF approach(Corporate
    Value Model) and the following data:
    ■ Debt: $30 million
    ■ Excess cash: $110 million
    ■ Shares outstanding: 50 million
    ■ Expected FCF in 2009: $45 million
    ■ Expected FCF in 2010: $50 million
    ■ Future FCF growth rate beyond 2010: 5%
    ■ Weighted-average cost of capital: 9.4%
    *Refer to slide 27 -29
    From 2010 on, we expect FCF to grow at a 5% rate. Thus, using the growing perpetuity
    formula, we can estimate IDX’s Terminal Enterprise Value in 2009(TV) = $50/(9.4% –
    5%) =$1136. → PV= D1/r-g ,r=9.4%/0.094 ,g=5%/0.05
    Adding the 2009 cash flow and discounting, we have
    Enterprise Value in 2008 = ($45 + $1136)/(1.094) = $1080.
    Adjusting for Cash and Debt (net debt), we estimate an
    Equity value of the firm = MV of firm + cash – MV debt =$1080m + 110m – 30m =
    $1160m.
    Dividing by number of shares: Stock share = $1160m/50m = $23.20.
    2. Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one year,
    and its expected price right after paying that dividend is $22.

    (a) What is Anle’s expected dividend yield?

    Expected dividend yield


    = 1/20
    = 0.05/5%

    (b) What is Anle’s expected capital gain rate?

    Expected capital gain rate


    = (22-20) / 20
    = 0.1/ 10%
    (c) What is Anle’s equity cost of capital?

    Equity cost of capital


    = 5% + 10%
    = 15%
    3. Krell Industries has a share price of $22 today. If Krell is expected to pay a
    dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at
    the end of the year, what is Krell’s dividend yield and equity cost of capital?

    Solution:
    Dividend Yield = 0.88 / 22.00 = 4%
    Capital gain rate = (23.54 – 22.00) / 22.00 = 7%
    Total equity cost of capital = 4% + 7% = 11%
    4. You notice that PepsiCo has a stock price of $52.66 and EPS of $3.20. Its
    competitor, the Coca-Cola Company, has EPS of $2.49. Estimate the value of
    a share of Coca-Cola stock using only this data.

    PepsiCo P/E = 52.66/3.20 = 16.46x

    Apply to Coca-Cola Company:


    Share price of coca cola EPS X P/E
    =$2.49 ×16.46
    = $40.98
    5. Explain Efficient Market Theory.
    Efficient Market - Market in which prices reflect all available information.
    ● Weak Form Efficiency
    - Market prices reflect all historical information, including past return. Thus, investors
    would gain little from technical analysis, or the practice of studying a stock’s price
    chart in an attempt to determine where the stock price is going to go in the future.

    ● Semi-Strong Form Efficiency


    - Market prices reflect all publicly available information. Thus , investors gain little
    from fundamental analysis, or the practice of examining a company’s financial
    statements and recent developments.

    ● Strong Form Efficiency


    - Market prices reflect all information, both public and private. Hence, investors can’t
    benefit from technical analysis, fundamental analysis, or insider information.

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