1ST SEM NMIMS April 2022 solved assignments Forecasting fu

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Equity Analysis and Evaluation II

1. Bobby read an analyst s recommendation that WM shares are at least 30% undervalued based on current market price. He of not very sure of the analyst s recommendations and decides to conduct the valuation himself. You are required to advise Bobby on the various approaches to that provide input to equity valuation. (10 Marks)

2. Forecasting future free cash flows is a rich and demanding exercise. Analysts use cash flow analysis to value a company and its equity securities by valuing free cash flow to the firm (FCFF) and free cash flow to equity (FCFE). As an analyst, you are required to differentiate between the two approaches by comparing and contrasting them with their respective formula. (10 Marks)

3.a. Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. Company estimates that its WACC is 12%.The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rf = 6% and market risk premium (rm) = 8%. Calculate the beta of the company? (5 Marks)

3.b. Consider a stock whose dividend at the end of 2016 is $1.40. Its dividends are set to grow by 2% for the next year (2017), before dividend growth drops to 1% (2018 and later. The required rate of return is given by 5%. Calculate the price of the stick based on Gordon s Growth model. (5 Marks)

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