finance assignment for academic.giant

1. General Dynamics, one of the largest defense contractors in the United States, reported EBITDA of $1,290 million in a recent financial year, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital expenditures amounted to $450 million during the year, and working capital was 7 percent of revenues (which were $13.5 billion). The firm had debt outstanding of $3.068 billion (in book value terms), trading at a market value of $3.2 billion, and yielding a pretax interest rate of 8 percent. There were 62 million shares outstanding, trading at $64 per share, and the most recent beta is 1.10. The tax rate for the firm is 40 percent. The firm expects revenues, earnings, capital expenditures, and depreciation to grow at 9.5 percent a year for the next 5 years, after which the growth rate is expected to drop to 4 percent. (Even though this is unrealistic, you can assume that capital spending will offset depreciation in the stable-growth period.) The company also plans to lower its debt/equity ratio to 50 percent for the steady state (which will result in the pretax interest rate dropping to 7.5 percent).

a. Estimate the value of the firm.

b. Estimate the value of the equity in the firm and the value per share

2. Chipotle went public in 2006. In the year prior to going public, it had revenues of $40 million, on which it reported earnings before interest and taxes of $12 million. The firm had no debt outstanding, and expected revenues to grow 35% a year from 2007 to 2010, 15% a year from 2011 to 2012, and 5% a year after that, while pre-tax operating margins (EBIT/Revenues) were expected to remain stable. Capital expenditures which exceeded depreciation by $5 million in the year prior to going public were expected to grow 20% a year from 2007 to 2012, as is depreciation. After 2012, capital expenditures are expected to offset depreciation. Working capital requirements are negligible.

The average beta of publicly traded fast-food chains with which Chipotle will be competing is 1.15, and their average debt-equity ratio is 25%. Chipotle does not plan on adding debt in the future. The firm faces face a tax rate of 40%.

a. Estimate the cost of equity for Chipotle at the time of the IPO.

b. Estimate the value of equity for Chipotle at the time of the IPO.

3. You have been asked by the owner of a small firm that produces and sells bike frames and components to estimate the value of his firm. The firm had revenues of $20 million in the most recent year, on which it made earnings before interest and taxes of $2 million. The firm had debt outstanding of $10 million, on which pre-tax interest expenses amounted to $1 million. The book value of equity is $10 million. The average beta of publicly traded firms that are in the same business is 1.30, and the average debt-equity ratio is 0.2 (based upon the market value of equity). The market value of equity of these firms is, on average, three times the book value of equity. All firms face a 40% tax rate. Capital expenditures amounted to $1 million in the most recent year, and were twice the depreciation charge in that year. Both items are expected to grow at the same rate as revenues for the next five years, and to offset each other in steady state.

The revenues of this firm are expected to grow 20% a year for the next five years, and 5% after that. Net income is expected to increase 25% a year for the next five years, and 8% after that.

a. Estimate the cost of equity for this private firm.

b. Estimate the cost of capital for this private firm.

c. Estimate the value of the owner's stake in this private firm

4. The following were the P/E ratios of firms in the aerospace/defense industry at the end of December, 2014, with additional data on expected growth and risk:

a. Estimate the average and median P/E ratios. What, if anything, would these averages tell you?

b. An analyst concludes that Thiokol is undervalued, because its P/E ratio is lower than the industry average. Under what conditions is this statement true? Would you agree with it here?

c. Using a regression, control for differences across firms on risk, growth, and payout. Specify how you would use this regression to spot under and overvalued stocks. What are the limitations of this approach?

5. You have been asked to do a discounted cash flow valuation of DIXT, a small publicly traded biotech firm. The company earned $ 20 million in after-tax operating income and reported capital expenditures of $ 8 million and depreciation of $ 4 million in the most recent year; non-cash working capital increased by $ 1 million during the year. It also did a stock acquisition for $ 5 million. At the start of the year, the book value of debt was $ 40 million and the book value of equity was $ 60 million.

a. Assuming that the current return on capital and reinvestment rate continue for the next 5 years, estimate the expected annual growth rate for the next 5 years.

b. Based on this expected growth rate, estimate the expected free cash flows to the firm for the next 5 years.

c. The firm is expected to have a cost of capital of 10% in perpetuity. At the end of year 5, the return on capital is expected to drop to 12% and the growth rate to 4%. Estimate the terminal value for the firm.

d. Assume that the market value of debt is equal to the book value of debt and that the firm has 10 million shares outstanding. Estimate the value of equity per share today.

-1-