FIN 305 Final Exam Spring 2020
1) Valuation [26 points]: You are comfortable with the pro forma information below. Assume that we are at the beginning of FY 2020, and we want to use the mid-year convention.
a) What is the enterprise value of the firm (using the terminal growth method)? _____________
) What is the enterprise value of the firm (using the terminal multiple method)? _____________
c) What is the share price estimate (using the terminal growth method)? _____________
d) What is the share price estimate (using the terminal multiple method)? _____________
e) What is the implied terminal EBITDA multiple when looking at the terminal growth method? _____________
f) What is the implied terminal growth rate when looking at the terminal multiple method? _____________
g) What is the implied cu
ent EBITDA multiple (using the terminal growth method)? _____________
h) What is the implied cu
ent EBITDA multiple (using the terminal multiple method)? _____________
SHOW YOUR WORK FOR QUESTION 1:
2) Another Valuation [28 points]: You are analyzing a potential customer service project that aims to reduce customer churn. Cu
ently, the company has 1.2 million customers and an annual churn rate of 15% (so, 15% of the company’s annual beginning customers will stop service each year). The new project is expected to decrease churn by three percentage points, to 12%. The company’s average revenue per user (ARPU) and variable costs for the next four years are shown below. When projecting revenue, the company uses the average number of customers during the year [(beginning customers + ending customers) / 2], and customers pay one month after service. The new project will not affect the number of gross additional customers (new customers) in future years. This company has no inventory, and the project will not affect accounts payable or required cash.
The new project will cost $5 million per year for the next four years. There is no Capex for this project. The relevant corporate tax rate is 24%, and the WACC is 16%. In four years, the company plans to migrate all customers to a new platform, and you estimate that at Year 4, the value of a customer will be $120 (the value of a customer at the end of Year 4). What is the NPV of this potential project (use the mid-year convention)?
3) [10 points] You want to estimate the damages of a bad decision made by management of a company. You look at the stock returns, and you see that after the market digested the decision and information, the stock price declined by 28%. Over this time period, the market (S&P 500) also declined by 6%. Your beta estimate for the company is XXXXXXXXXXThe risk-free rate during this time period was 3.20%, and the market risk premium was 6.10%. For simplicity, let’s assume that you are looking at annual data (so, the returns over a full year). The value of the firm before this bad decision was $5.2 billion, and the firm had $1 billion in debt. Calculate the damages.
Amounts in $ thousands2019A2020E2021E2022E2023E2024E
Revenue76, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,799
COGS(28, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,342)
Gross Profits47, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,457
SG&A(38, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,655)
EBIT9, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,802
Interest expense(1, XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,044)
EBT8, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,758
Provision for taxes(1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,330)
Net Income6, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,428
Relevant Balance Sheet items
Required cash10, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,387
Excess cash3,691 - - - - -
Accounts receivable6, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,096
Inventory5, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,256
Total cu
ent assets26, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,739
Accounts payable1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,920
Notes payable XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Total cu
ent liabilities1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,960
Net PP&E27, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,711
Long term debt15, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,000
Depreciation1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,856