Problem 1

Analyst used cost of equity to discount FCFF

Expected FCFF 180
Value of firm 2000
Growth rate 3%

After-tax cost of debt 4.50%

Debt to capital = 20%

First, back out the cost of equity used by the analyst

Cost of equity = 12.00%
Cost of capital = 10.500%

Value of firm = $2,400.00

Problem 2
Valuing a bank
Base year 1 2
Risk adjusted assets $12,000.00 $12,480.00 $12,979.20
ROE 6.00% 8.00% 9.00%
Tier 1 capital 15.00% 16.00% 17.00%
Tier 1 capital= Book equity

Base 1 2

Net Income $108.00 $159.74 $198.58

- Reinvestment in Tier 1 $196.80 $209.66
FCFE -$37.06 -$11.08
Tier 1 capital $1,800.00 $1,996.80 $2,206.46

Problem 3
Base year 1 2
Revenues $20,000.00 $24,000.00 $26,000.00
Operating margin (pre-tax0 -10% -5% 5%
Sales to capital = 2.00 2.00 2.00
Tax rate = 25%
NOL = $ 3,000.00

1 2 3
Revenues $24,000.00 $26,000.00 $28,000.00
Operating incone -$1,200.00 $1,300.00 $4,200.00
Taxes 0 0 $325.00
EBIT (1-t) -$1,200.00 $1,300.00 $3,875.00
- Reinvestment $2,000.00 $1,000.00 $1,000.00
FCFF -$3,200.00 $300.00 $2,875.00

NOL $ 4,200.00 $ 2,900.00 $ -

Problem 4
Expected FCFF 500
Cost of capital 8%
Growth rate 3%

Debt $3,000.00
Cash $500.00 Price to book
Minority holdings $750.00 2.00
Minority Interest $1,000.00

Value of operating assets $10,000.00

+ Cash $500.00
+ Minoriy holdings $1,500.00
- Debt $3,000.00
- Minoirty Interests $2,000.00
Value of equity $7,000.00

Problem 5
EV/Sales 2.4
Reinvestment rate 20%
Cost of capital 9%
Growth rate 4.00%
(Growth and Sales to invsted capital will remain unchanged, but margin will drop by half)
First, back out the after-tax operating margin
After-tax operating margin = 15.00%
Return on capital = 20.00%
Sales to capital ratio =
If you halve the margin
New after-tax return on capital 7.50%
New return on capital = 10.00%
New reinvestment rate = 40.00%
New EV to Sales 0.90

Problem 6
Private Business
FCFF 30
Value as a private business $200.00
Expected growth rate 4%
Illiquidity discount on value 20%

Riskfree rate 4%
ERP 5%

Cost of equity as private business = 16.000000%

Value as a public company 500

FCFF 30
Expected growth rate 4%
Public Cost of equity (capital) 10.00%
Market Beta = 1.20
Total Beta = 2.40
Correlation with market 0.5

Problem 7
Before After
Revenues (next year) 100 100
Affter-tax operating margin 8% 8%
Cost of capital 10% 9%
Expected growth rate 4%
Enterprise Value 48

48 = After-tax operating income (1- g/ROIC)/ (Cost of capital -g)

48 = (100*.08) (1-4%/X)/(10%-4%)
Current reinvestment rate = 0.64
Current retun on capital 6.25%

New return on capital 0.125

Cost of capital 9%
Value of firm $108.80

Problem 8
PHR Health Neo Hospitals Combined firm
Expected Revenues next year $1,500.00 $600.00 2100
After-tax operating income $90.00 $90.00 $192.00
Invested capital $900.00 $450.00 1350
Expected growth rate 3% 3% 3%
Cost of capital 9% 9% 9%
Tax rate 25% 25% 20%

Return on capital 10% 20% 14%

Reinvestment rate 30.0% 15.0% 21.1%
Value of firm $ 1,050.00 $ 1,275.00 $ 2,525.00

Problem 9
Developed reserves Undeveloped reserves
Annual cash flow (millions) $400 # barrels= 50
Cost of capital 9% Dev cost = $1,500
Number of years 10.00 Riskless rate = 4%
Life of reserves = 12
d1 = 0.8061 N(d1) = 0.7899
d2 = -0.2332 N(d2) = 0.4078

Value of developed reserves = $ 2,567.06

Enterprise value = $ 3,176.06
Value of undeveloped reserves = $ 609.00

Value of undeveloped reserves = S N(d1) - K exp(-rt) N(d2)

609 = S (0.9578) - 1500 exp (-.04)(12) (0.7537)
S = Value of oil in undev reserves = $ 1,250.17
 3
$13,498.37
10.00%
18.00%

$242.97
$223.24
$19.73
$2,429.71

3
$28,000.00
15%
2.00
 Value of synergy
$ 200.00

ped reserves