The magnitude of a company's value-to-book ratio depends heavily on its
A. expected book equity growth B. Profit margins C. sales turnover D. none of the above
Companies can grow their equity base by (chose all that apply)
A. taking out new long term debt B. issuing new stock C. taking on additional short term debt D. reinvesting profits
Valuation under the Discounted Cash Flow method involves
A. Forecasting free cash flows available to equity holders over a finite forecast horizon
B. Forecasting free cash flows beyond the terminal year based on some simplified assumptions
C. Discounting free cash flows to equity holders at the cost of equity
D. All of the above
Which of the following are advantages of defining values in terms of ROE's (choose all that apply)
A. It uses the same key measures of performance that are decomposed in a standard financial analysis
B. ROE's are much easier to calculate than other performance measurements
C. It enhances the analyst's ability to evaluate the reasonableness of their forecasts by benchmarking them with REO's of other companies in the industry
D. All of the above
The magnitude of a company's value-to-book ratio depends heavily on its
A. expected book equity growth B. Profit margins C. sales turnover D. none of the above
Companies can grow their equity base by (chose all that apply)
A. taking out new long term debt B. issuing new stock C. taking on additional short term debt D. reinvesting profits
Valuation under the Discounted Cash Flow method involves
A. Forecasting free cash flows available to equity holders over a finite forecast horizon
B. Forecasting free cash flows beyond the terminal year based on some simplified assumptions
C. Discounting free cash flows to equity holders at the cost of equity
D. All of the above
Which of the following are advantages of defining values in terms of ROE's (choose all that apply)
A. It uses the same key measures of performance that are decomposed in a standard financial analysis
B. ROE's are much easier to calculate than other performance measurements
C. It enhances the analyst's ability to evaluate the reasonableness of their forecasts by benchmarking them with REO's of other companies in the industry
D. All of the above
Related questions
MNA is a retail store that operates through its stores across the USA. The following table (MNA Data as of end of 2016) shows data as of end 2016. BOD is a group considering LBO (leveraged buyout option) of MNA at the beginning of 2017. BOD is considering 25% equity and 75% debt. Group made the projections for 10 years (2017 through 2026) as shown below.
MNA Data as of end 2016
Debt on balance sheet $4,658 millions
Shareholders' equity at book value $3,524 millions
Market value of equity $6,300 millions
Market equity beta 0.88
Income tax rate 35%
BOD Assumptions
Debt 75%
Equity 25%
___________________________________________
Risk free rate 4.2%
Market risk premium 5%
Interest Rate 10%
Free cash flows to equity and debt holders (millions)
| Year 2017 | $778 |
| Year 2018 | $821 |
| Year 2019 | $864 |
| Year 2020 | $790 |
| Year 2021 | $754 |
| Year 2022 | $864 |
| Year 2023 | $859 |
| Year 2024 | $887 |
| Year 2025 | $945 |
| Year 2026 | $1,014 |
Questions:
a. Compute the unlevered market equity beta (asset beta) of MNA. Assume that the market value of debt is same as the book value.
b. Compute the cost of equity for BOD group with new capital structure. Risk free rate and market risk premium are provided in table BOD assumptions above.
c. Using the cost of equity calculated in question b, compute the weighted average cost of capital for BOD. Interest rate is provided in the table BOD assumptions.
d. Compute the present value of free cash flows to all debt and equity capital stakeholders at the weighted average cost of capital. Ignore the midyear adjustment. Assume that the free cash flows grow at 3% after 2026 for computing the continuing value.
e. Assume that BOD acquired MNA for the value calculated in d. Will BOD have the cash flows sufficient to pay the interest? Explain.
