Mix Flashcards
FCFO, other things being equal, increase if:
a) Shareholders underwrite a capital increase
b) Dividends decrease
c) Accounts receivables decrease
d) Trade liabilities decrease
c) Accounts receivables decrease
Accounts receivables decrease -> working capital decrease -> Change in net working capital will be a positive item.
- Shareholders are below FCFO
- Dividends are below FCFO
- Trade liabilities decrease will be a negative item for the net working capital and the change will be negative.
In calculating free cash flows, which of the following is/are not NOT an investment that should be subtracted from gross cash flows?
a) Change in operating working capital
b) Change in debt outstanding
c) Net capital expenditures
d) Investment in goodwill and acquired intangibles
b) Change in debt outstanding
- Working capital is above it
- CAPEX is included
- Investment in goodwill and acquired intangibles, synonym of CAPEX and will therefore be included.
Hence change in debt outstanding will be subtracted.
A and B operate in the very same industry, in the same Country and sell the same products. They are listed and debt-free, and assume no taxes. Their respective FCFO, constant and perpetual, are 110 and 125, and market capitalizations are respectively 850 and 935. Which company most likely manufacture its product internally, rather than relying on outsourcing?
a) A
b) B
c) A and B are equal
d) It can’t be said
b) B
See notes. Page 157
Island Inc is a publicly traded company that has 120 in bank loans on its books, with a stated interest rate of 3% and 165 in publicly traded bonds,, which were issued under par, with a coupon rate of 3,9%. The company currently has a bond rating of BBB, with a default spread of 1,75% over the risk free rate. If the current T-Bill rate is 1%, the ten-year T-Bond rates 4,5% and the marginal tax rate is 40%, what is the pre-tax cost of debt?
a) 3.52%
b) 6.25%
c) 2.75%
d) 8.02%
b) 6.25%
k_D=Long term risk free rate+spread
k_D=4.5%+1.75%=6,25%
Facebook Inc was the first social network to go through an IPO in 2012. In that year, the company had no debt. It is highly likely that the market valued Facebook with:
a) DCF asset side
b) Trading multiples
c) APV
d) All of the above would have worked well
a) DCF asset side
- You cannot apply trading multiples because it was the first social network to go through an IPO, hence there were no comparables and the trading multiples cannot be used. It would be complex or weak to apply other comparables.
- APV can, formally speaking, be used, but then the value of the tax shield would be equal to 0. So, it doesn’t make any sense.
Hence DCF would be the most likely method to evaluate the Inc.
A company generates FCFO of 100 in 2016, 110 in 2017 and 121 in 2018. WACC is 10% and perpetual growth is 0%. How much is enterprise value on 31/12/2016?
a) 1,510.0
b) 1,410.0
c) 1,200.0
d) 1,300.0
c) 1,200.0
The cash flow of 2016 is not included in the enterprise value calculation. This is due to the fact that the cash flow has already happened on the valuation date, and therefore will be visible in the balance sheet at the valuation day. If included, it would be “double cash flow”
EV_31.12.16=110/1.1^1 +121/1.1^2 +((121*(1+0%))/(0.1-0))/1.1^2 =100+100+1,210/1.1^2 =1,200
EV/sales is a multiple:
a) That takes into account a company’s profitability
b) Allows to directly asses the market value of shareholder’s equity
c) Appropriate for mature businesses
d) Appropriate for banks
c) Appropriate for mature businesses
- It doesn’t take into account a company’s profitability because sales will be unaffected by the EBIT-margin or EBITDA-margin.
- It doesn’t allow to directly assess the market value of shareholder’s equity because the result is enterprise value.
- Is not appropriate for banks because there aren’t any sales in the banking industry.
Therefore, by exclusion, this is appropriate for mature businesses. This is because in mature businesses, the profitability mostly aligns in the market.
A company issues this business plan including financials for 2018 (last fiscal year), 2019 and 2020, with an EBITDA of respectively 100, 120 and 130, net debt of respectively 300, 350 and 400. Market capitalization on 31/12/2018 is 1000. Comparables average EV/EBITDA multiples are 10x for 2018, 9x for 2019 and 8x for 2020. WACC is 10%. How much is Alfa’s equity value as of the end of the last FY with a forward +2 (2020) multiple?
a) 740
b) 640
c) 600
d) 528.9
a) 740
Forward multiple in 2020: 8x EBITDA in 2020: 130 EV=130*8=1,040 EqV=FY_2020-Net debt_(2018 (at valuation date)) EqV=1,040-300=740
Carrefour SA, a supermarket chain, will most likely:
a) Have negative noncash working capital
b) Not easily get a bank loan
c) Have high fixed costs
d) Never be a target of a leveraged buyout
a) Have negative noncash working capital
Receivables are very low, inventory are ‘normal’ and payables are very high. Hence, they will most likely have a negative noncash working capital.
- They will easily get a bank loan because they are a highly cash generating company.
- D&A’s are not a big issue in the retail business, hence they don’t have to high fixed costs.
- Because they are an industry easily financed by debt, they can be a target of a leveraged buyout.
You are valuing a young business in the hardware industry. Its 2023 forecast FCFO is equal to € 10 million, whose probability of success is equal to 70%. WACC based on similarly young businesses in the industry is equal to 18%, while based on more mature hardware companies it would be equal to 10%. In a DCF model, in 2023 you should consider:
a) A FCFO of 7 and a WACC of 18%
b) A FCFO of 10 and a WACC of 18%
c) A FCFO of 10 and a WACC of 10%
d) None of the above
b) A FCFO of 10 and a WACC of 18%
Discussing uncertainty. In the most common DCF models, the numerator is not weighted by any probability or predictions of success. No success rate is taken into account; hence the uncertainty is not accounted for in the numerations. The uncertainty is to be find in the denominator, the discount rate, here represented by the WACC. It will always be wrong to either double account for the uncertainty, or not account for it at all. You always have to account risk/ uncertainty.
With an equity side DCF model, cash flows to shareholders should be discounted using:
a) The cost of debt
b) The weighted average cost of capital
c) The weighted average cost of capital minus the cost of debt
d) the cost of equity
d) the cost of equity
In determining the levered cost of equity of a company, the market risk premium is weighted by its:
a) Variance
b) Standard deviation
c) Beta
d) Alfa
c) Beta
