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    Corporate Finance - Exercises Session 1 - Solutions

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    LouisRem
    This document provides solutions to exercises related to corporate finance. It includes calculations for time value of money, financial statement analysis, weighted average cost of capital (WACC), and company valuation. Key calculations shown include net present value, return on equity, DuPont analysis, free cash flow to the firm, and discounted cash flow valuation. Financial ratios such as receivables turnover, inventory turnover, and cash conversion cycle are also computed from sample income statements and balance sheets.

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    Corporate Finance - Exercises Session 1 - Solutions

    Uploaded by

    LouisRem
    484 views5 pages
    This document provides solutions to exercises related to corporate finance. It includes calculations for time value of money, financial statement analysis, weighted average cost of capital (WACC), and company valuation. Key calculations shown include net present value, return on equity, DuPont analysis, free cash flow to the firm, and discounted cash flow valuation. Financial ratios such as receivables turnover, inventory turnover, and cash conversion cycle are also computed from sample income statements and balance sheets.

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    Corporate Finance - Exercises session 1 - Solutions

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    This document provides solutions to exercises related to corporate finance. It includes calculations for time value of money, financial statement analysis, weighted average cost of capital (WACC), and company valuation. Key calculations shown include net present value, return on equity, DuPont analysis, free cash flow to the firm, and discounted cash flow valuation. Financial ratios such as receivables turnover, inventory turnover, and cash conversion cycle are also computed from sample income statements and balance sheets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    484 views5 pages

    Corporate Finance - Exercises Session 1 - Solutions

    Uploaded by

    LouisRem
    This document provides solutions to exercises related to corporate finance. It includes calculations for time value of money, financial statement analysis, weighted average cost of capital (WACC), and company valuation. Key calculations shown include net present value, return on equity, DuPont analysis, free cash flow to the firm, and discounted cash flow valuation. Financial ratios such as receivables turnover, inventory turnover, and cash conversion cycle are also computed from sample income statements and balance sheets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Corporate Finance (FINA0050) 2018 – Exercises session 1 : solutions

    Fundamentals – Q1
    a)

     n = 3 years
     interest rate (annual) = 1%
     interest rate (monthly-equivalent) = (1 + 1%)1/12 − 1 = 0.083%
    (1+0.083%)36 −1
    FV = $500 × [ ]= $18,263.78  ok, you will have enough to finance the car.
    0.083%

    b)
    Amount × (1 + 1%)3 = $18,000
    $18,000
     Amount = (1+1%)3 = $17,470.62  you need to invest this amount today

    Fundamentals – Q2
    $10,000
    PV = (1+1.25%)10 = $8,832

    NPV = $8,832 - $8,000 = $832 > 0  invest in the watch


    Financial analysis – Q1

    End N-1 End N


    Sales 170 180
    COGS 102 108 60% of sales

    A/R 13.6 14.4 8% of sales


    A/P 20.4 21.6 20% of COGS
    Inventory 9.18 9.72 9% of COGS

    WC/NWC 2.38 2.52 A/R + Inventory – A/P


    Investment 0.14 Outflow

    Financial analysis – Q2

    N-1 N
    a) 7.59 8.08 Receivables turnover
    b) 22.47 26.82 Inventory turnover
    c) 57.31 53.65 DPO
    6.37 6.80 Accounts payable turnover
    d) 48.09 45.17 DSO
    16.24 13.61 DIO
    e) 7.03 5.13 CCC (= DSO + DIO – DPO)
    Corporate Finance (FINA0050) 2018 – Exercises session 1 : solutions

    Financial analysis – Q3
    a)

    Year 0 Year 1
    ROE 30% 35% Net income/Equity
    Net profit margin 21.67% 19.90% Net income/Sales
    Assets turnover1 68% 67% Sales/Total assets
    Leverage2 2.03 2.65 Total assets/Equity

    DuPont decomposition: ROE = Net profit margin × Assets turnover × Leverage


    = ROA (Net income/Total assets) × Leverage

    From Year 0 to Year 1, ROE increased even if net profit margin decreased as well as assets
    turnover (slightly). The increase in ROE is thus explained by the sharp increase in leverage
    from Year 0 to Year 1.

    b)

    ROA can be defined as Net income/Total assets (see above) (1) or by EBIT(1-Tc)3/Total assets (2):

    ROA (1) 14.78% 13.38%


    ROA (2) 15.64% 14.22%

    ROA decreased but thanks to leverage, ROE increased.

    FCFF – Q1

    0 1 2 3
    SalesMarket 200,000.0 220,000.0
    (1) SalesAugur 1,100.0 1,265.0 1,328.3
    (2) COGS 220.0 253.0 265.7 20% of SalesAugur
    (3) Other OPEX 110.0 126.5 132.8 10% of SalesAugur
    (4) EBITDA 770.0 885.5 929.8 (1) – (2) – (3)
    (5) D&As 300.0 300.0 300.0 1,500/5
    EBIT 470.0 585.5 629.8 (4) – (5)
    NOPAT 305.5 380.6 409.4 EBIT(1-35%)
    NOPAT + D&As 605.5 680.6 709.4
    CAPEX (1,500.0)
    FCFF (1,500.0) 605.5 680.6 709.4

    1 Also called “assets efficiency” or “asset use efficiency”


    2 Also called “equity multiplier”
    3 Also called NOPAT or NOPLAT
    Corporate Finance (FINA0050) 2018 – Exercises session 1 : solutions

    FCFF – Q2

    N N+1 N+2
    Revenue 2,000,000 2,100,000 2,205,000 Increase by 5%/year

    Assetsbeginning 1,500,000 1,675,000

    CAPEX 325,000 237,250 See below


    D&As 150,000 167,500 Assetsbeginning/10

    Assetsend-year 1,500,000 1,675,000 1,744,750 Assetsbeginning + CAPEX – D&As

    CAPEXN+1 = 300,000 (new machinery) + 10,000 (installation) + 1% × 1,500,000 (maintenance) =


    325,000

    CAPEXN+2 = 2,205,000 × 10% + 1,675,000 × 1% = 237,250

    WACC – Q1

    RD 4.50% 4% + 0.5%
    Risk-free rate 1.50%
    Leverage 0.6 (D/E)
    BetaU 0.95
    Tc 30%
    E(Rm) 6.50%

    BetaL = Beta 1.349 0.95 × [1+0.6 × (1-30%)]


    RE 8.25% 1.50% + 1.349 × (6.50% - 1.50%)

    We 0.625 1/(1+0.6)
    Wd 0.375 1 – 0.625

    WACC 6.33%

    WACC – Q2

    Beta
    (= BetaL) D/E Tc BetaU

    Prism 1.1 1.5 35% 0.56

    Yota 1.3 2.3 35% 0.52

    xOS 0.9 1 35% 0.55

    BetaU, eView 0.54 =Mean


    Corporate Finance (FINA0050) 2018 – Exercises session 1 : solutions

    100
    BetaL, eView = BetaU, eView × [1+ 55 × (1-35%)] = 1.18

    RE = 2% + 1.18 × (6% - 2%) = 6.72%


    RD = 3.50%
    WE = 55/155
    WD = 100/155
    Tc = 35%
    WACC = 3.85%
    Valuation – Q1
    a)

    0 1 2 3 4 5 6…
    Value? 2,000 2,000 2,000 2,000 2,000 Liquidated for 0

    1 − (1+10%)−5
    PV = $2,000 × [ ] = $7,582
    10%

    b)
    𝐶𝐹 𝐶𝐹5 (1+𝑔) $2,000 (1+2.5%)
    PV5 = (𝑟−𝑔)
    6
    = (𝑟−𝑔)
    = (10%−2.5%) = $27,333

    c)
    $27,333
    PV = PV from question a) + PV of question b)’s answer = $7,582 + = $24,553
    (1+10%)5
    Corporate Finance (FINA0050) 2018 – Exercises session 1 : solutions

    Valuation – Q2
    RE = 10%
    RD = 2%
    WE = 60%
    WD = 40%
    Tc = 25%
    WACC = 6.60%

    N N+1 N+2 N+3

    EBITDA 1,000 1,100 1,210 1,331

    D&As 150 150 150

    EBIT 950 1,060 1,181

    NOPAT 713 795 886

    FCFF 863 945 1,036

    TV 29,634

    DCFs 809 832 25,319

    a)
    Enterprise Value (EV) = $26,959
    b)
    Equity Value = EV – net debt (15,665) = $11,294
    Price/share = 11,294*1,000,000/120,000,000 = $94.
    Valuation – Q3
    a)
    𝐸𝑉
    Enterprise Value (EV) = 𝐸𝐵𝐼𝑇 × 𝐸𝐵𝐼𝑇𝐾𝑒𝑟𝑙𝑢𝑥 = 29 × $35 = $1,015
    𝑃𝑒𝑒𝑟𝑠

    b)
    Net debt = Debt – Cash = 100 – 20 = $80
    Equity Value = EV – Net debt = $1,015 – $80 = $935
    Price/share = $935/20 = $46.75

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