Problem Set Week 4

Purpose

Try to solve the following set of problems related with contents explored in Week 4. Revisit the learning
materials made available during Week 4.

Duration

Try to solve this set of problems in 50 minutes, maximum.

Problem set

Exercise 1

1. You are an asset manager valuing Company TXB which you are considering to eventually include in the
equity component of your portfolio. After collecting information, you estimated the following items:

a) What should be the missing value for the 2027 expected capex? Justify your answer.
b) Calculate the Free Cash Flow to Firm of TXB for each year between 2023 and 2027.

2. Still regarding TXB, you have the additional assumptions and information:
o Reference average risk free rate: 2%
o Target Debt/(Debt+Equity) ratio: 25%
o Expected average debt spread: 3%
o Reference Equity Risk premium: 6%;
o Equity Beta: 1.35;
o Long term inflation: 2%;
o Expected real growth of FCF in perpetuity: 0.5%.
o Expected TXB interest bearing debt at 2023 year end: €3.000.000;
o Expected TXB cash position at 2023 year end: €1.300.000;
o Expected TXB Financial Investments at 2023 year end: €2.750.000.
 o TXB number of outstanding shares: 650.000.
o Current market price of TXB shares: €37/share.
o Corporate tax rate: 30%

a) Considering the CAPM model and the estimated capital structure of TXB, calculate the appropriate
rate of discount of estimated FCF
b) Assuming the company has no expected life limit. What is the terminal value of TXB?
c) Calculate the Enterprise Value of TXB at year end 2023
d) Calculate the Equity Value of TXB at year end 2023
e) Considering current market price, what would be your investment decision regarding TXB?

Exercise 2

Consider the following information about Companies A and B

(DPS stands for Dividends per share and EPS stands for Earnings per share)

1. What is the Price-Earnings multiple of each company?

2. Considering the obtained figures, as an asset manager would you feel comfortable to say that one company
is relatively cheaper than other? Justify qualitatively and quantitatively your answer.