Q32. A firm's free cash flow to the firm (FCFF) in the most recent year is $80M and is expected to grow at 3% per year forever. If the firm has $100M in debt financing and its weighted average cost of capital is 10%. The value of the firm's equity using the single-stage FCFF model is:
A) $1,177M.
B) $1,043M.
C) $1,077M.
Q33. Beachwood Builders merged with Country Point Homes in December 31, 1992. Both companies were builders of mid-scale and luxury homes in their respective markets. In 2004, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point as of December 31, 2004.
When the books closed on 2004, Beachwood had $140 million in debt outstanding due in 2012 at a coupon rate of 8%, a spread of 2% above the current risk free rate. Beachwood also had 5 million common shares outstanding. It pays no dividends, has no preferred shareholders, and faces a tax rate of 30%. When valuing common stock, Bernhiem’s valuation models utilize a market risk premium of 11%.
The common equity allocated to Country Point for the spin-off was $55.6 million as of December 31, 2004. There was no long-term debt allocated from Beachwood.
The Managing Director in charge of Bernheim’s construction group, Denzel Johnson, is prepping for the valuation presentation for Beachwood’s board with Cara Nguyen, one of the firm’s associates. Nguyen tells Johnson that Bernheim estimated Country Point’s net income at $10 million in 2004, growing $5 million per year through 2008. Based on Nguyen’s calculations, Country Point will be worth $223.7 million in 2008. Nguyen decided to use a cost of equity for Country Point in the valuation equal to its return on equity at the end of 2004 (rounded to the nearest percentage point).
Nguyen also gives Johnson the table she obtained from Beachwood projecting depreciation (the only non-cash charge) and capital expenditures:
|
$(in millions) |
2004 |
2005 |
2006 |
2007 |
2008 |
|
Depreciation |
5 |
6 |
5 |
6 |
5 |
|
Capital Expenditures |
7 |
8 |
9 |
10 |
12 |
Looking at the numbers, Johnson tells Nguyen, “Country Point’s free cash flow (FCF) will be $25 million in 2006.” Nguyen adds, “That’s FCF to the Firm (FCFF). FCF to Equity (FCFE) will be lower.”
Regarding the statements by Johnson and Nguyen about FCF in 2006:
A) only Johnson is incorrect.
B) only Nguyen is incorrect.
C) both are incorrect.
Q34. If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about FCF and its components is least accurate?
A) FCFE = (EBIT × (1 ? tax rate)) + Depreciation ? FCInv ? WCInv.
B) FCFF = (EBITDA × (1 ? tax rate)) + (Depreciation × tax rate) ? FCInv ? WCInv.
C) WCInv is the change in the working capital accounts, excluding cash and short-term borrowings.
Q35. What is the cost of capital that Nguyen used for her valuation of Country Point?
A) 17%.
B) 15%.
C) 18%.
Q36. Given Nguyen’s estimate of Country Point’s terminal value in 2008, what is the growth assumption she must have used for free cash flow after 2008?
A) 9%.
B) 7%.
C) 3%.
Q37. The value of beta for Country Point is:
A) 1.27.
B) 1.09.
C) 1.00.
Q38. What is the estimated value of Country Point in a proposed spin-off?
A) $162.6 million.
B) $144.5 million.
C) $178.3 million.
Q39. SOX, Inc., expects high growth in the next 4 years before slowing to a stable future growth of 3%. The firm is assumed to pay no dividends in the near future and has the following forecasted free cash flow to equity (FCFE) information on a per share basis in the high-growth period:
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
FCFE |
$3.05 |
$4.10 |
$5.24 |
$6.71 |
High-growth period assumptions:
Stable-growth period assumptions:
What is the present value on a per share basis for SOX, Inc.?
A) $64.24.
B) $77.15.
C) $70.49.
Q32. A firm's free cash flow to the firm (FCFF) in the most recent year is $80M and is expected to grow at 3% per year forever. If the firm has $100M in debt financing and its weighted average cost of capital is 10%. The value of the firm's equity using the single-stage FCFF model is:
A) $1,177M.
B) $1,043M.
C) $1,077M.
Q33. Beachwood Builders merged with Country Point Homes in December 31, 1992. Both companies were builders of mid-scale and luxury homes in their respective markets. In 2004, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point as of December 31, 2004.
When the books closed on 2004, Beachwood had $140 million in debt outstanding due in 2012 at a coupon rate of 8%, a spread of 2% above the current risk free rate. Beachwood also had 5 million common shares outstanding. It pays no dividends, has no preferred shareholders, and faces a tax rate of 30%. When valuing common stock, Bernhiem’s valuation models utilize a market risk premium of 11%.
The common equity allocated to Country Point for the spin-off was $55.6 million as of December 31, 2004. There was no long-term debt allocated from Beachwood.
The Managing Director in charge of Bernheim’s construction group, Denzel Johnson, is prepping for the valuation presentation for Beachwood’s board with Cara Nguyen, one of the firm’s associates. Nguyen tells Johnson that Bernheim estimated Country Point’s net income at $10 million in 2004, growing $5 million per year through 2008. Based on Nguyen’s calculations, Country Point will be worth $223.7 million in 2008. Nguyen decided to use a cost of equity for Country Point in the valuation equal to its return on equity at the end of 2004 (rounded to the nearest percentage point).
Nguyen also gives Johnson the table she obtained from Beachwood projecting depreciation (the only non-cash charge) and capital expenditures:
|
$(in millions) |
2004 |
2005 |
2006 |
2007 |
2008 |
|
Depreciation |
5 |
6 |
5 |
6 |
5 |
|
Capital Expenditures |
7 |
8 |
9 |
10 |
12 |
Looking at the numbers, Johnson tells Nguyen, “Country Point’s free cash flow (FCF) will be $25 million in 2006.” Nguyen adds, “That’s FCF to the Firm (FCFF). FCF to Equity (FCFE) will be lower.”
Regarding the statements by Johnson and Nguyen about FCF in 2006:
A) only Johnson is incorrect.
B) only Nguyen is incorrect.
C) both are incorrect.
Q34. If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about FCF and its components is least accurate?
A) FCFE = (EBIT × (1 ? tax rate)) + Depreciation ? FCInv ? WCInv.
B) FCFF = (EBITDA × (1 ? tax rate)) + (Depreciation × tax rate) ? FCInv ? WCInv.
C) WCInv is the change in the working capital accounts, excluding cash and short-term borrowings.
Q35. What is the cost of capital that Nguyen used for her valuation of Country Point?
A) 17%.
B) 15%.
C) 18%.
Q36. Given Nguyen’s estimate of Country Point’s terminal value in 2008, what is the growth assumption she must have used for free cash flow after 2008?
A) 9%.
B) 7%.
C) 3%.
Q37. The value of beta for Country Point is:
A) 1.27.
B) 1.09.
C) 1.00.
Q38. What is the estimated value of Country Point in a proposed spin-off?
A) $162.6 million.
B) $144.5 million.
C) $178.3 million.
Q39. SOX, Inc., expects high growth in the next 4 years before slowing to a stable future growth of 3%. The firm is assumed to pay no dividends in the near future and has the following forecasted free cash flow to equity (FCFE) information on a per share basis in the high-growth period:
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
FCFE |
$3.05 |
$4.10 |
$5.24 |
$6.71 |
High-growth period assumptions:
Stable-growth period assumptions:
What is the present value on a per share basis for SOX, Inc.?
A) $64.24.
B) $77.15.
C) $70.49.
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