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03 - Tutorial 3 - Week 5

The document provides information and questions related to capital markets and financial concepts. It includes balance sheet information for LaForge Systems to calculate FCFF and FCFE. It also provides information about Phaneuf Accelerateur to value using FCFF and FCFE, including income, capital expenditures, debt, costs of debt and equity. Additional questions involve valuing shares of Bron and Mackinac Inc. using two-stage DDM and FCFE approaches.

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Jason Chow
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41 views

03 - Tutorial 3 - Week 5

The document provides information and questions related to capital markets and financial concepts. It includes balance sheet information for LaForge Systems to calculate FCFF and FCFE. It also provides information about Phaneuf Accelerateur to value using FCFF and FCFE, including income, capital expenditures, debt, costs of debt and equity. Additional questions involve valuing shares of Bron and Mackinac Inc. using two-stage DDM and FCFE approaches.

Uploaded by

Jason Chow
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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T UTORIAL 3

Q UEEN ’ S U NIVERSITY B ELFAST


Q UEEN ’ S M ANAGEMENT S CHOOL

Capital Markets (FIN3013)

Week 5
Question 1
Using the balance sheet information provided in the Appendix for the year 2008 for
LaForge Systems, Inc., calculate the company’s:

1. FCFF.

2. FCFE.

3. Show the adjustments to FCFF that would result in FCFE.

4. Show the adjustments from the current levels of CFO, EBIT, and EBITDA to
find FCFF.

5. Show the adjustments from the current levels of CFO, EBIT, and EBITDA to
find FCFE.

Question 2
You are evaluating Phaneuf Accelerateur by using FCFF and FCFE valuation. You
have collected the following information:

• Phaneuf has net income of 250 million, depreciation of 90 million, capital


expenditures of 170 million, and an increase in working capital of 40 million.

• Phaneuf will finance 40 percent of the increase in net fixed assets (capital ex-
penditures less depreciation) and 40 percent of the increase in working capital
with debt financing.

• Interest expenses are 150 million. The current market value of Phaneufs out-
standing debt is 1,800 million.

• FCFF is expected to grow at 6.0 percent indefinitely, and FCFE is expected to


grow at 7.0 percent.

• The tax rate is 30 percent.

• Phaneuf is financed with 40 percent debt and 60 percent equity. The before-tax
cost of debt is 9 percent, and the before-tax cost of equity is 13 percent.

• Phaneuf has 10 million outstanding shares.

Question 3
Bron has EPS of 3.00 in 2002 and expects EPS to increase by 21 percent in 2003.
EPS are expected to grow at a decreasing rate for the following five years, as shown
in the following table.

2
In 2008, the growth rate will be 6 percent and is expected to stay at that rate there-
after. Net capital expenditures (capital expenditures minus depreciation) will be
5.00 per share in 2002 and then follow the pattern predicted in the table. In 2008,
net capital expenditures are expected to be 1.50 and will then grow at 6 percent
annually. The investment in working capital parallels the increase in net capital ex-
penditures and is predicted to equal 25 percent of net capital expenditures each year.
In 2008, investment in working capital will be 0.375 and is predicted to grow at 6
percent thereafter. Bron will use debt financing to fund 40 percent of net capital
expenditures, and 40 percent of the investment in working capital. The required
rate of return for Bron is 12 percent.

• Estimate the value of a Bron share using a two-stage FCFE valuation approach.

Question 4
Consider the information for Mackinac Inc., a US-based manufacturing company,
provided in the Appendix. The company has announced that it has finalized an
agreement to handle North American production of a successful product currently
marketed by a company headquartered outside North America. Jones decides to
value Mackinac by using the DDM and FCFE models. After reviewing Mackinacs
financial statements and forecasts related to the new production agreement, you
conclude the following:

• Mackinacs earnings and FCFE are expected to grow 17 percent a year over the
next three years before stabilizing at an annual growth rate of 9 percent.

• Mackinac will maintain the current payout ratio.

• Mackinacs beta is 1.25.

• The government bond yield is 6 percent, and the market equity risk premium
is 5 percent.

A Calculate the value of a share of Mackinacs common stock by using the two-stage
DDM.

B Calculate the value of a share of Mackinacs common stock by using the two-stage
FCFE.

3
Appendix

Question 1

4
Question 3

5
Question 4

6
7

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