Three calculation questions~btw, no references.
FIN 305Final ExamSpring 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)? _____________ b) 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 current EBITDA multiple (using the terminal growth method)? _____________ h) What is the implied current 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. Currently, 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 1.22. The 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 Revenue76,045 106,649 139,111 169,304 185,691 196,799 COGS(28,821) (40,526) (53,558) (66,028) (72,790) (77,342) Gross Profits47,224 66,123 85,553 103,276 112,901 119,457 SG&A(38,022) (50,125) (62,600) (74,493) (79,847) (82,655) EBIT9,202 15,998 22,953 28,783 33,054 36,802 Interest expense(1,048) (971) (971) (1,053) (1,045) (1,044) EBT8,154 15,027 21,982 27,730 32,009 35,758 Provision for taxes(1,506) (3,080) (4,506) (5,684) (6,561) (7,330) Net Income6,648 11,947 17,476 22,046 25,448 28,428 Relevant Balance Sheet items Required cash10,646 15,997 20,866 22,856 24,139 25,387 Excess cash3,691 - - - - - Accounts receivable6,458 8,765 11,052 12,987 14,244 15,096 Inventory5,369 7,661 10,271 12,843 14,159 15,256 Total current assets26,164 32,423 42,189 48,686 52,542 55,739 Accounts payable1,342 1,943 2,641 3,346 3,689 3,920 Notes payable272 266 358 172 164 40 Total current liabilities1,614 2,209 2,999 3,518 3,853 3,960 Net PP&E27,652 38,088 48,811 58,380 62,946 66,711 Long term debt15,725 15,725 17,000 17,000 17,000 17,000 Depreciation1,256 2,239 3,047 3,856