INV3701
INV3701
Investments: Equity Asset Valuation
Assignment Solutions: Semester 1 2022 Assignment 2
SEMESTER 1
ASSIGNMENT 02 Due date and time: 4 April 2022 at 13H00
Unique number: 822592
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation: application and
process, equity return concepts, the dividend discount model and free cash flow models. Refer to lessons
1 to 4 in the study guide, which include chapters 1, 3 to 5 and, 7 to 8 in the prescribed book.
The following assignment contains 20 multiple-choice questions. [20 marks]
Questions
1. Which one of the following statements is most likely correct?
1. FCFF model is an example of a relative valuation model.
2. Free cash flow to the firm is cash flow available only to common shareholders.
3. The value of a firm is equal to the value of the operating assets and the non-operating assets.
Use the following information to answer question 2.
German Manufacturing has free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) of
R3.46 and R5.22 million, respectively. The required rate of equity is 10.4% and the weighted average
cost of capital is 16.1%. German Manufacturing has outstanding debt of R11.75 million. The following
information on the growth rates is available:
Growth rate
FCFE 4.5%
FCFF 6.5%
, 2. Calculate the total value of German Manufacturing’s equity by using the FCFF valuation method.
1. R19.22 million
2. R26.63 million
3. R38.38 million
Firm Value = FCFF1 /Wacc -g
= 3.46(1.065)/0.161-0.065
= R38.38
Equity value = Firm value – Market value of debt
= 38.38-11.75 = R26.63m
3. The increase in fixed assets is defined as ...
1. capital expenditure less depreciation.
2. net income less capital expenditure.
3. net income less depreciation less capital expenditure.
Use the following information to answer questions 4 and 5.
Tshilidzi Mulaudzi wants to value Shayadima Holdings using a single-stage FCFF approach. Tshilidzi
gathered the following information with regard to valuing Shayadima Holdings.
Shares outstanding 200 000
Market value of debt R438 000
Next year’s FCFF R201 652
Equity beta 1.2
Return on the market index 10.3%
Risk-free rate 3.5%
Before tax cost of debt 10.3%
Tax rate 30%
Company finance debt with 40%
FCFF growth rate 5.5%
2
INV3701
Investments: Equity Asset Valuation
Assignment Solutions: Semester 1 2022 Assignment 2
SEMESTER 1
ASSIGNMENT 02 Due date and time: 4 April 2022 at 13H00
Unique number: 822592
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation: application and
process, equity return concepts, the dividend discount model and free cash flow models. Refer to lessons
1 to 4 in the study guide, which include chapters 1, 3 to 5 and, 7 to 8 in the prescribed book.
The following assignment contains 20 multiple-choice questions. [20 marks]
Questions
1. Which one of the following statements is most likely correct?
1. FCFF model is an example of a relative valuation model.
2. Free cash flow to the firm is cash flow available only to common shareholders.
3. The value of a firm is equal to the value of the operating assets and the non-operating assets.
Use the following information to answer question 2.
German Manufacturing has free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) of
R3.46 and R5.22 million, respectively. The required rate of equity is 10.4% and the weighted average
cost of capital is 16.1%. German Manufacturing has outstanding debt of R11.75 million. The following
information on the growth rates is available:
Growth rate
FCFE 4.5%
FCFF 6.5%
, 2. Calculate the total value of German Manufacturing’s equity by using the FCFF valuation method.
1. R19.22 million
2. R26.63 million
3. R38.38 million
Firm Value = FCFF1 /Wacc -g
= 3.46(1.065)/0.161-0.065
= R38.38
Equity value = Firm value – Market value of debt
= 38.38-11.75 = R26.63m
3. The increase in fixed assets is defined as ...
1. capital expenditure less depreciation.
2. net income less capital expenditure.
3. net income less depreciation less capital expenditure.
Use the following information to answer questions 4 and 5.
Tshilidzi Mulaudzi wants to value Shayadima Holdings using a single-stage FCFF approach. Tshilidzi
gathered the following information with regard to valuing Shayadima Holdings.
Shares outstanding 200 000
Market value of debt R438 000
Next year’s FCFF R201 652
Equity beta 1.2
Return on the market index 10.3%
Risk-free rate 3.5%
Before tax cost of debt 10.3%
Tax rate 30%
Company finance debt with 40%
FCFF growth rate 5.5%
2
