INV3701 Exam Memo October 2019

MEMO – INV3701 OCT /NOV 2019

MCQ QUESTIONS 1 to 30



ANSWER EXPLANATION
• Market based valuation methods such as Price multiples
1 1 are relative valuation techniques.
• 2 & 3 are Absolute valuation techniques

2 3 ERP = market return - Rf
• The value of a company (intrinsic value) under a going
3 1 concern assumption.
• Assumption: The company will continue its business
activities into the foreseeable future #focus of the module.

BYRP = Bond return + risk premium
4 1 = 1.8 +9.10 = 10.90

WACC = 0.3(8 x 0.7) +0.45 (14) +0.25 (6) = 9.48%
5 1 WACC is used as a discount rate



6 2 Value = D0 (1 + g)/ r – g
OR
Value = D1/ r – g

56(1.055)/0.082-0.55 = 54.70

After valuing the asset is it worth investing in it?
7 1 • Undervalued (MP < IV) Buy the asset,
• Overvalued (MP > IV)
• Sell it or don’t buy.



8 2 Use the basic valuation model DDM

CF0 = 0
CF1 = 1
CF2 = 1.5 + 31.50
I/YR = 7

CPT NPV = 29.76



+27815657602

, • Undervalued (MP < IV) Buy the asset,
9 3 • Overvalued (MP > IV) Sell it or do not buy.
• Fairly valued (MP = IV). Hold or keep



10 3
Solve for g using trial and error
11 3
Constant growth model
P = D0(1+g)/ r -g
42 = 2(1+g)/0.09 -g
12 3
13 3
14 3
15 3
16 3
17 1
18 3
19 2

20 3 FCFE = NI + NCC – FC (inv) – WC (inv) + NB

NB = Weight of debt (Fixed inv-depreciation) + Weight of debt
(WC inv)

NB = 0.5(300-150) +0.5(100)
= 75 +50
= 125

FCFE = 700 +150 -300 -100 +125
= R575 million

FCFF = NI +NNC+ Int (1 -T) - FCInv - WCInv +PD
21 1 = 700 +150 +300(1-0.3) -300-100
= R660 million



22 1 VF = FCFF1 / WACC – growth
or FCFF0 (1 + g) / WACC – g
= 660(1.05)/0.1-0.05
= 13 860




+27815657602