CFA Level 2 － Mock Exam 2 （AM）模考试题 Q5 (part 1 - Part 6)

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Question 5

Flores Media Corp. is a Spanish-language radio, television, and print media conglomerate with principal offices in California and distribution nationwide. Flores’ CEO, Francisco Jimenez, has been approached by Conglomerated Media, Inc. about selling his interest in Flores and becoming COO for Conglomerated. Jimenez owns 52 percent of Flores’ 10 million shares of common equity outstanding.

Flores is an attractive target for Conglomerated because of its enormous revenue growth. Over the past 15 years under Jimenez’ direction, Flores has achieved 42 percent compound growth in revenue while maintaining its net profit margin at an impressive 20 percent. Carter Bradshaw, CEO of Conglomerated, believes that the days of enormous growth are behind Flores. He expects revenue growth at the firm to slow linearly from 30 percent next year to 5 percent in year 6. However, that still makes Flores an attractive target because Bradshaw believes that Jimenez can increase Flores’ profit margin as the firm matures and its expansion costs decline. Net income for the upcoming year is forecasted at $3.60 per share if profit margins stay stable. Bradshaw expects Jimenez to increase the firm’s net profit margin in equal increments each year, beginning in year 2 until it hits 25 percent in Year 6 and stabilizes there.

Depreciation in the upcoming year is expected to reach $4.00 per share, and grow along with revenue. Net fixed capital investment is budgeted at $1.00 per share in each year as part of the firm’s expansion program, until Year 6 when it is projected to begin growing in line with revenue. Working capital investment is anticipated to be $1.50 per share in the upcoming year, growing in line with revenue.

The firm has no preferred stock and only $250 million in long-term debt, which pays 12 percent and trades at par. In view of the firm’s 40 percent tax rate, the debt burden is miniscule. Even so, Jimenez expects to keep the growth in interest expense to only 10 percent per year through restructuring and refinancing until Year 6, when growth in interest expense should equal the growth in sales. The firm does not plan to finance its expansion with any new debt.

Bradshaw would target a 20 percent weighted average cost of capital for Flores during its rapid growth phase, but thinks the figure should come down to a more modest 14 percent in the stable growth phase. Based on his calculations, Bradshaw tells Jimenez, “We’ve done our due diligence, and based on our numbers, $18 per share is a fair price for your interest in Flores Media.” Jimenez counters that, using Bradshaw’s own numbers, the value of the firm exceeds $45 per share.

They suspend negotiations for the evening.

Part 1)

Bradshaw decides to calculate free cash flow to the firm (FCFF) startng with net income. Which statement regarding how to derive free cash flow to the firm (FCFF) from net income is least accurate?

A) Subtract fixed capital investment.

B) Add amortization of intangibles.

C) Add working capital investment.

D) Add interest expense adjusted for taxes.

Part 2)

What is free cash flow to equity (FCFE) per share in Year 5?

A) $6.99.

B) $6.11.

C) $4.35.

D) $8.75.

Part 3)

Which value is closest to the percentage growth in FCFF in Year 4?

A) 22%.

B) 15%.

C) 32%.

D) 20%.

Part 4)

If the growth rate of FCFF were 7 percent beginning in year 6 rather than 5 percent, how much would that add to the value that Bradshaw should be willing to pay for Flores Media?

A) $24.44.

B) $12.69.

C) $9.82.

D) $110.00.

Part 5)

Regarding the statements made by Bradshaw and Jimenez about the per share value of Flores Media:

A) Bradshaw’s statement is correct; Jimenez’s statement is correct.

B) Bradshaw’s statement is incorrect; Jimenez’s statement is correct.

C) Bradshaw’s statement is correct; Jimenez’s statement is incorrect.

D) Bradshaw’s statement is incorrect; Jimenez’s statement is incorrect.

Part 6)

If Jimenez and Bradshaw agreed to calculate the terminal value of the Flores Media using the median industry forward P/E of 12 instead of a discounted cash flow method, what impact would that have on the price that Bradshaw should be willing to pay for Flores?

A) A decrease of $22.08.

B) An increase of $7.42.

C) An increase of $22.08.

D) An increase of $8.87.