GESTÃO FINANCEIRA II

CORPORATE FINANCE II
ADVANCED CORPORATE FINANCE

Problem Set 3

Licenciatura – Undergraduate Course

1st Semester 2021 - 2022

 Problem Set 3
th
SUBMISSION DEADLINE: December 6 , 2021 - 23:59H |e-mail: victormbarros@iseg.ulisboa.pt

Chapter 19 & 20 – Valuation / Understanding Options

- Identify your assumptions whenever you deem necessary –

1) Assume you work for a research department within an European private equity firm and
engaged in the financial analysis of specific below the radar companies. One of those
companies is called “MACH3” which presents the following historical data:

Year 1 Year 2 Year 3

Eur 000 2018 2019 2020

Sales 3,000 3,300 2,500

COGS -1,350 -1,485 -1,125
Other Operational Costs -600 -700 -750
EBITDA 1,050 1,115 625
Depreciation -190 -200 -220
Provisions -150 -180 -150
EBIT 710 735 255
Interest -72 -78 -84
Extraordinary P/L -50 100 -500
EBT 588 757 -329
Tax -147 -189 -82
Profit after Tax 441 568 -411

Net Working Capital 120 135 100

CAPEX 200 300 50

For the following years (from Year 4 to Year 8 / 2021-2025), please consider the forecast
assumptions below:

• Sales: Annual Growth of 10.0% (Years 4 and 5) and 8.0% (Years 6 to 8)

• EBITDA Margin: 30.0% (Years 4 and 5) and 35.0% (Years 6 to 8)
• Depreciation: regarding past CAPEX (until Year 3) – €220.000/year; 10.0% annual
depreciation rate over new CAPEX (from Year 4 onwards)
• Provisions (for potential contingencies): 7.5% over Sales
• Corporate Tax Rate: 25%; tax losses may be carried forward for 5 years
• Net working capital: 12.5% over EBITDA
• New CAPEX: €125,000/year on Year 4 and 12.5% annual growth onwards
• Long-run growth rate: 2% / year (for perpetuity estimate purposes)
 For the expected rate of firm return consider the following parameters:

• Risk-free rate: 1.00%

• Firm’s overall Beta: 1.33
• Market Risk Premium: 5.50%
• Expected Return on Debt: 3.25%
• Debt / Equity ratio: 25%

In addition, at the end of 2020, the Company’s outstanding debt amounts to €2,000,000
(market value = book value) and the free float of MACH3 is 300,000 shares (free float 70%).

What is the expected share price at the beginning of Year 2021?

2) Assume that Mr Mark Smith borrows the present value of €150, buys a 6-month put option
on stock “American Disaster” with an exercise price of €300, and sell a six-month put option
on “American Disaster” with an exercise price of €150.

a) Draw a position diagram showing the net payoff when the option expires.

b) Suggest two alternative combinations (loans, options, as well as the underlying stock that
may grant Mr Mark Smith the same net payoff).