INV3701_ASSIGNMENT_2 2020.

INV3701_ASSIGNMENT_2 2020. Investments: Equity Asset Valuation. FCFF includes a reduction for investments in working capital and after-tax interest expense. 2. An increase in earnings before interest and tax (EBIT) will have a positive effect on free cash flow to equity. 3. The DDM model is best for valuing firms for takeovers or in situations that have a reasonable chance for a change in corporate control. An increase in earnings before interest and tax (EBIT) will have a positive effect on FCFE. Refer to pages 235–240, and 318–319. 9 QUESTION 14 14. Which one of the following statements is most likely correct about price multipliers? 1. The P/E ratio is hardly recognised and is rarely used by investors. 2. Price-to-cash flow is less subject to manipulation by management than earnings. 3. P/B ratio will generally be negative even when earnings per share (EPS) is negative. Price to cash flow is less subject to manipulation by management than earnings. Refer to pages 366–367, 399–400, and 417–418. 10 QUESTION 15 15. Determine the value of Shandu Limited using a single-stage residual income model. 1. R17.23 2. R29.91 3. R35.93 Total Equity = Total Assets – Total Liabilities = 790m – 500m = 290m B0 = = R11.60 = (1 – 0.80) × 22.30 = 4.46% = 11.60 + 11.60 = 11.60 + (2.0972) 11.60 = 11.60 + 24.3278 = R35.93 Refer to pages 276–280, and 478–479. 11 QUESTION 16 16. Shandu Limited’s shares are most likely: 1. overpriced 2. fairly priced 3. underpriced The estimated value of Shandu Limited is R35.93, which is lower than the market price of R40.58. The share is overpriced at the market price. Refer to page 3. QUESTION 17 17. Calculate the firm’s P/S ratio based on the above fundamentals. 1. 0.08 2. 0.10 3. 0.12 = = = 0.12 Refer to pages 414–416. 12 QUESTION 18 18. The terminal value based on a perpetuity of 3’s residual income is closest to: 1. R100.55 2. R124.40 3. R144.90 Beginning book value Plus: earnings Less: dividends (EPS x dividend payout) Ending book value Residual income EPS Less: equity charge= beginning book value x required rate of return Residual income Residual income is not expected to grow after year 3, therefore we use the perpetuity ratio. Terminal Value of Residual Income = = R144.90 Refer to page 469-472, 483 [NB: multistage residual income model (2