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25. cont. Intrinsic Value Calculations(20 marks)Please refer to the information on the previous pagea) Calculate the intrinsic share price as at the end of fiscal year 2007using the FCFF model, if you assume the following growth rates in FCFF, and stating any assumptions you wish to make. (10 marks)b) Calculate the intrinsic share price at the end of fiscal 2007 using the Earnings MultiplierModel. (5 marks)c) Is the stock a good purchase, based on your calculations in a) and b)? Explain why or why not. (3 marks)d) What are two other valuation techniques or methods, besides Discounted Cash Flow Analysis and Relative Valuation Techniques, that you may you consider when analyzing a firm’s share price? (2 marks)Solution: Atkinson Financial Advisors Inc.SOLUTION - Q25 (a)2007EBIT127EBIT(1-t)95.25(tax rate = 25%)+depr44-cap exp-42-ch. W/C-50$75 increase in current assets minus $25 increase in current liab.-ch.other assets0FCFF047.25Alternate Solution: +_ change in net assets ($15) --> FCFF0 = $32.35Discounted0.129143YeargfcffFCFFtat WACC2008 (t=1)0.2257.645051.05202009 (t=2)0.1868.021153.35142010 (t =3)0.1880.264955.75442011(t=4)0.1289.896755.30292012 (t=5)0.12100.684354.85512013 (t=6)0.08108.7390Terminal Value FCFF5 = 108.7390/(WACC - gfcff)Page 10 of 13
2212.71WACC = wex ke+ wdx kd x (1 - T)Kd = current YTM = 7.00%Ke = Rf + B x (Rm - Rf)= .0425 + 1.2 x (.135-.0425)= .1535 = 15.35%Value of Debt = D = 300millionValue of Equity = E = 32 million shares x $29.50/sh =944millionV = D + EMarket Value% KiWACCDebt3000.241160.07Equity9440.758840.1535V124412.9143%Note: Book value weights were also accepted and given full marks, althoughmarket value weights are used more I nindustry.Value of Firm = V = FCFF1/(1+WACC)^1 + FCFF2/(1+WACC)^2 + FCFF3 /(1+WACC)^3 + FCFF4/(1+ WACC)^4 + FCFF5/(1+WACC)^5 + TV5/(1+WACC)^5= 51.052 + 53.3514 + 55.7544 + 55.3029 + 54.8551 + 2212.71/(1.129143)^5V =1475.85V = D + E(most students missed this part!)=> E = V - D=> E = 1475.85 - 300=1175.85value of equity32million shares outstabding$36.75Equity value per shareAlternate Solutions: You would have still received full marks if you followed all of the above stepsbut used book value weights or the variation on FCFF calculation which included the change in net assetsOne alternate solution, Price per share =$22.132Q25 (b) - Calculate Price using Earnings Multiplier ModelP=DPS1/EPS1Eke- gePage 11 of 13
WhereDPS1 =Dividend per share at end of 2008=1.125 x (1.22)=1.3725EPS1 =Earnings per share at end of 2008=2.25 x (1.22)=2.745Kecalculated from CAPM in Part A0.1535gyou need to determine "g" AND YOU NEED TO STATE ASSUMPTIONS HEOption 1if use 22% then k > g and model does not work.Option 2most reasonable - assume g = 9% (Industry growth rate)You can use 9% in numerator and DPS/EPS ratio does not changei.e. DPS/EPS = 50%=>P=DPS1/EPS1Eke- g=1.3725 / 2.745.1535 - .09=36.19XP = 36.19 x $2.745 = = $99.34Option 3Calculate g where g = RR x ROE--> g = 1.125/2.25 x Net Income /Equity= 0.50 x 72/463= 0.50 x 0.1555= 7.775%=>P=DPS1/EPS1Eke- g=1.3725 / 2.745.1535 - .07775Page 12 of 13
=6.60XP = 6.60 x $2.25x(1.07775) = = $16.0025 c)IF Intrinsic prices calculated in (a) and (b) are greater than actual price ($29.50)=> Stock is currently undervalued - > BUYIF Intrinsic prices calculated in (a) and (b) are lower than actual price ($29.50)=> Stock is currently overvalued -> SELL25 d)List any of the following TWO techniques:MVAEVAFrancise FactorGrowth Duration ModelNet Asset ValueTechnical Analysis*End of exam*Page 13 of 13