PRÁCTICA DIRIGIDA 3

1. An analyst estimates equity value by discounting FCFE at WACC in the FCFE model and estimates firm and equity value by discounting
FCFF at required rate of return on equity in the FCFF model This will most likely:
a. Overestimate equity value with the FCFE model and underestimate firm value and equity value with the FCFF model
b. Underestimate equity value with the FCFE model and overestimate firm value and equity value with the FCFF model
c. Underestimate equity value with the FCFE model and underestimate firm value and equity value with the FCFF model
2. ABC company reported the following information:
FCF 5,000,000
Target debt to equity 0.25
Debt Market Value 10,000,000
# Shares 2,000,000

Tax Rate 40.00%

r 16.00%
Before tax cost of debt 8.00%
Long term growth rate FCFF 5.00%
Using a single stage FCFF model, calculate the value of ABC stock.
3. Choche Capital has the following capital structure:
Market Value Before Tax
Security Type
US$ Required Return

Prefered Stock 200 0.07

Bonds 600 0.075
Common Stock 700 0.14
Total 1500
And also provides the following information.
Bonds Trading at Par
Prefered Share Dividends 14
Net Income Available to Common 125
Invesment in working capital 30
Investment in fixed capital 100
New new borrowing 40
Depreciation 50
Tax Rate 40%
Long term growth rate of FCFF 4%
Long term growh rate of FCFE 4%
WACC 9.27%
a. Calculate the FCFF of Choche Capital.
b. Using a single stage FCFF model, calculate the value of Choche Capital
c. Calculate the value of Choche Capital equity
d. Calculate the current FCFE
4. ABC pays dividends and follows a constant payout ratio policy. The company’s management is confident of a huge increase in revenue
growth over the next four to five years. To meet the capital needs for growth opportunities, ABC’s management is contemplating the
issuance of debt or common stock.
You are a junior equity analyst at La27LaGanamosTodos Fund, and follows regional small-cap stocks trading in the over-the-counter
market. Pedro Troglio, a senior equity analyst at La27LaGanamosTodos, asks you to evaluate ABC and prepare a research report for
updating the firm’s recommendation about the stock. He gives you ABC’s financial data, which is shown in Exhibits 1 and 2.
Exhibit 1: Income Statement Excerpts, Years
Ending 31 December
($ millions) 2016 2015
EBITDA 275.00 250.00
Depreciation expense 100.00 95.00
Operating income 175.00 155.00
Interest expense 16.00 14.90
Income before taxes 159.00 140.10
Income taxes 56.50 48.00
Net income 102.50 92.10
Common dividend 48.00 44.80
Exhibit 2: Selected Balance Sheet Data, Years Ending 31 December
($ millions)
Net investment in fixed capital 165.3
Net increase in working capital -1.8

2016 2015
Current assets 354.2 322
Accumulated depreciation 257.5 175
Notes payable 5 15
Long-term debt 135 150
Common stock (50 million shares
800 800
outstanding)
Retained earnings 159.3 87.3
Total liabilities and equity 1,265.00 1,150.00
 Additionally, Pedro gives you the following market data:
Exhibit 3: Market Data

Current Equity Market Yield 10.00%

US T-Bill 30 years 3.00%
Standard Deviation of the Industry
600
Returns
Standard Deviation of the Market
700
Returns
Correlation Between Market and
1.12
Idustry Returns
ABC Debt to Equity 0.5
a) Calculate ABC’s FCFE for 2016.
b) Calculate ABC’s price per stock.
c) Calculate ABC’s FCFF for 2016.
d) Calculate ABC’s value of firm.
5. MWC reported the following statement of cash flows:

And the following:

2 years +
Earnings and FCFE Growth 15% 8%

Maintains dividend payout Ratio

Beta 1.2
Government Bond Yields 6.40%
Market Equity Risk Premium 5.50%
Most Recent Dividen 2.3

a. Calculate the value of MWC common stock using a two stage DDM
b. Calculate the value of MWC common stock using the two stage FCFE