Valuation Quiz Essay

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Question 1

Palm & Sun's (PS) free cash flows are expected to be $200 million next year and $488 million two years from now. After that, free cash flows are expected to grow at a constant rate of 3% per year forever. P&S’s WACC is 11%, its cost of equity is 14% and its cost of debt is 9.5%. They have $400 million of debt and $78 million in cash on their balance sheet. Use the discounted cash flow model to find P&S’s current equity value (rounded to the nearest million dollars).
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Correct Answer
5676 margin of error +/- 2 Question 2

Swamp & Sand Industries has the following data. The discount rate is 12%. Terminal value is 3 times FCF. Cash and debt are constant. Calculate its Enterprise …show more content…
The discount rate is 12%. Terminal value is 3 times FCF. Cash and debt are constant. Calculate its Equity Value. | 20X1 | 20X2 | 20X3 | Free Cash Flow | 1040 | 1040 | 1040 | Cash | 112 | 112 | 112 | Debt | 298 | 298 | 298 |
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Correct Answer
4528.3 margin of error +/- 1
Free Cash Flow and terminal value are discounted at 12% to get enterprise value. Enterprise Value -Debt -Cash =Equity Value Note: To conform with the class notes, we do subtract cash. Question 9

Swamp & Sand Industries has the following data. The interest rate is 5%, and the unlevered cost of equity is 12%. There are no terminal values, the firm sinks into bankruptcy. Calculate its Adjusted Present Value (APV). | 20X1 | 20X2 | 20X3 | FCF | 115 | 115 | 115 | Interest Expense | 27 | 27 | 27 | You Answered

Correct Answer
349.4 margin of error +/- 2
DCF is Discounted Cash Flow. Note we use FCF. At 12% 3 yrs, the PVA1 = 2.4 So FCF *2.4 = DCF. To find the PVA1 (the present value of a $1 annuity): 1=P/YR 3=N 12=I/YR 1=PMT 0=FV PV=2.4 Question 10

For Palm and Sun Industries, calculate depreciation given the following data: Beg PPE | 176 | End PPE | 238 | Cap Ex | 106 |

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Correct Answer
44 margin of error +/- 1
Net PPE = PPE - A/D CapEx = 2012 Net PPE - 2011 Net PPE + 2012 Dep Note: the changes in A/D may not make sense. That is due to programming
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