(Solved) BX 3032 Advanced Business Modelling/ BX 3032 Quiz 2.

BX 3032 Quiz 2. What cash flow models for valuation have you incorporated into your project for the value of the firm and/or the value of equity? Of the discounted-cash-flow methods which you think is likely to be the best and why? 3. Explain how you estimated your forecasted values for the discounted cash flow model and the dividend model in your project. 4. How did you estimate the terminal value for the discounted cash flow model and how did this value contribute to the overall present value of cash flows? That, is what percentage was the present value of the terminal value relative to the total value of cash flows? How important is this value to your valuation story? Relate your answer to your group project. 5. Adam Forbis is evaluating Twinkle Inc. by using the FCFF and FCFE valuation approaches. Adam has collected the following information (in AUD): • Twinkle Inc. has net income of $450 million, depreciation of $100 million, capital expenditures of $200 million, and an increase in working capital of $50 million. • Twinkle Inc. will finance 35% of the increase in net fixed assets (capital expenditures less depreciation) and 40% of the increase in working capital with debt financing. • Interest expenses are $200 million. The current market value of Twinkle outstanding debt is $2,000 million. • FCFF is expected to grow at 5% percent indefinitely, and FCFE is expected to grow at 8% indefinitely. • Tax rate is 30%. • Twinkle Inc. is financed with 40% debt and 60% equity. The before- tax cost of debt is 9%, and the before-tax cost of equity is 14%. • Twinkle Inc. has 10 million outstanding shares. a) Using the FCFF valuation approach, estimate the total value of the firm, the total market value of equity, and the per-share value of equity. b) Using the FCFE valuation approach, estimate the total market value of equity and the per-share value of equity. 6. What is Ohlson’s valuation model? You must define each parameter. Under what circumstances do we need to adjust Ohlson's model (i.e. core vs. non-core)? How are the notions of "savings account" type firm and "investment fund" type firm blended into Ohlson's valuation model? How would you determine “k” in the Ohlson’s Model? 9. In Ohlson's valuation model, what is the meaning of ? What is the intuition for incorporating in the valuation model? 10. Use the following information to estimate the intrinsic value of Ribbon Co.’s common stock using the residual income model: • Ribbon C total assets of $4.5m, finance with twice as much debt capital as equity capital • Ribbon Co.’s pre-tax cost of debt is 7%, and cost of equity capital is 12%. • Ribbon C EBIT of $350,000 and was taxed at a rate of 30%. EBIT is expected to continue at $350,000 indefinitely. • Ribbon Co.’s book value per share is $30. • Ribbon C 50,000 shares of common stock outstanding. • Ribbon Co.’s payout ratio is 100%. 11. he following is the regression outputs for daily, weekly and monthly betas of GWA Limited. GWA is a leading Australian Department Store that sells clothing cosmetics, homewares, toys and electrical goods. It also has a substantial online sales component as wells as brick and mortar establishments in all the major cities in Australia. If you were to choose the beta of the company for the purposes of estimating the cost of equity, which would you choose and why? A regression between the returns of GWA Limited and the All Ordinaries Price Index based on DAILY prices over two years: 12. Is the CAPM the only way to estimate the return on equity? Explain your answer fully giving the alternatives if any. 13. What is the formula for the weighted average cost of capital? 14. In estimating the weighted average cost of capital (WACC), how would you estimate the weights used in the WACC? Relate to your project company. 15. Explain how you estimated the cost of debt for your project company. What steps would you take in estimating the cost of equity? Cost of debt is the current cost of debt capital of a comparable duration and a comparable risk, this might be costs of raider’s debt as raiders pool of assets security for lender. In some situations, the appropriate cost of debt would be that of the target as its capital structure would over whelm that of the raider. An issue with this, however, is that the interest expense is average expense cost over the year and financial debt is the end balance. 16. Explain when you would use the WACC as the discount rate in a valuation calculation. What other rate you would use for other valuation approaches (write no more than one page)? 17. How would you determine a company's financial distress (or bankruptcy) risk? 18. Why would the Castagna and Matolcsy Z score be preferable to use in Australia rather than Altman? 19. What are the limitations of quantitative models such as Altman, Castagna and Matolscy, and the one you have developed in your workshop? 20. How are these numbers a sign of default risk?