FINC2011 Tutorial 11 Wk 13_TC_Final.pptx

FINC2011 Tutorial 11 Wk 13_TC_Final.pptx - FINC2011...

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The University of Sydney Page 1 FINC2011 Tutorial 11 Revision Thomas Chen [email protected]
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The University of Sydney Page 2 Final Assignment Tips Forecasting Growth Rates 1. Implied Growth Rate using DDM Rearrange this equation and solve for g using the current Price, CAPM-calculated ‘r’, and last dividend 2. Using this formula Management usually announces their payout ratio targets in annual reports/presentations ROE can be calculated (EPS/Book value per share), or taken from Morningstar 3. Historical growth rates of dividends and EPS 4. Growth rates of comparable companies 5. Growth rates estimated by research houses NOTE: –. Remember to sense check your growth rate estimate (long-run inflation rate) < ‘g’ < (long-run GDP growth)
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The University of Sydney Page 3 Short Answer Question – Example 1 Investment Banks perform a very different function to commercial banks in the financial system. Explain the main differences between these two types of financial institutions, and provide one example of the type of service an investment bank provides to its clients. Commercial banks provide deposit-taking functions and intermediated financing Investment banks provide advisory services and capital raising 1. Advising on M&A transactions 2. Placement of new debt/equity securities with investors 3. Underwriting new share and debt issues 4. Advising clients on balance-sheet restructuring 5. Principal investing
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The University of Sydney Page 4 Capital Budgeting + WACC – Example 1 Xentia Technologies Group (XTG) is considering investing in developing new 4D television technology. If the new project goes ahead it is expected that it be operational at the beginning of year 2 (with the first revenues generated by the end of that year). Once the new project is operational it will render the company’s existing 2D technology project obsolete. The new project has an operating life of six years. Company tax rate is 30% Xentia is financed with $25 million debt and $50 million equity (market values) Xentia has a beta of 1.6 Revolutionary Technology Corporation (RTC) is currently using technology that is similar in risk profile to the new 4D project. RTC is financed with $40 million in debt and $40 million in equity (market value) RTC has a beta of 1.75 Xentia borrows debt capital at a cost of 8% p.a. compounded semi- annually The long term market risk premium is 9.75% p.a. The current yield on Commonwealth Bonds is 4.25% p.a. a) What is the appropriate discount rate that should be used to evaluate the project?
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The University of Sydney Page 5 Capital Budgeting + WACC – Example 1 Xentia Technologies Group (XTG) is considering investing in developing new 4D television technology. If the new project goes ahead it is expected that it be operational at the beginning of year 2 (with the first revenues generated by the end of that year). Once the new project is operational it will render the company’s existing 2D technology project obsolete. The new project has an operating life of six years.
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