BX 3032 Advanced Business Modelling/ BX 3032 Quiz 2 ALL ANSWERS 100% CORRECT FALL-2021 SOLUTION GUARANTEED GRADE A+

What cash flow models for valuation have you incorporated into your project for the value of the firm and/or the value of equity? The cash flow models that have been incorporated into the project for Panoramic Resources Limited (PAN) have been the Discounted Cash Flow (DCF) valuation model and the Comprehensive Cash Flow (CCF) model. Out of the two techniques the DCF valuation model is the most accurate as it estimates the value of an investment based on future cash flows. This method helps find the present value of expected future free cash flows (FCF) using a discount rate. In the project for PAN we used the Weighted Average Cost of Capital (WACC) as the discount rate for our model, as it makes the estimation easier due to the frequent changes to the cost of debt and equity values which influence the WACC rate. As for the comprehensive cash flow model, it calculates the per share value of the company by using the WACC and the cost of equity, while also considering tax rates and super growth. Of the discounted-cash-flow methods which you think is likely to be the best and why? Out of the two methods the DCF model is better than CCF. The CCF method is not as accurate as the DCF model and is not preferred among investors and other users. Out of the two methods the DCF model allows the terminal value to be calculated where a sensitivity analysis can be conducted as well as takes into consideration the value of debt, which can lead to a more accurate valuation. 3. Explain how you estimated your forecasted values for the discounted cash flow model and the dividend model in your project. The estimated forecast values for the discounted cash flow model and dividend model were from numerous approaches of forecasting. These approaches were the random walk model, pro-forma financial statements, line item and ratio trends/time series and ratio-based models. With these approaches there were multiple methods used which were linked to the ROA and ROE analysis. These methods were used to determine the best forecast for the company that was chosen and gives insight to how the company could perform under the different approaches. As listed below it shows how each method that was used in order to determine the forecast for the company. • Last year’s ratio (this might make more sense for leverage that tends to be more stable/change slowly) • Simple average of all years (for stable companies some average might work) • Average of the last 2-3 years (recent years are more relevant for most firms) • Median of all years as a measure of central tendency not biased by large values• Equation using linear regression (LINEST and INTERCEPT functions) • Trend predicted from prior graphical analysis • ‘Other’ is open but could include some measure of the past with an upward/downward trend adjustment (e.g last year + 5-10%?), CPI, average excluding any ‘abnormal’ years, or even industry average or some other benchmark. • Or you could enter a ‘Manual Value’. 4. How did you estimate the terminal value for the discounted cash flow model and how did this value contribute to the overall present value of cash flows? That, is what percentage was the present value of the terminal value relative to the total value of cash flows? How important is this value to your valuation story? Relate your answer to your group project. Perpetual FCFn (2029)x(1 + g(short-term)) = x (1+0.03) = Perpetual DCF = /((0.0615)-(0.0035)) = Discounted Terminal Value (perpetuity 10 year) = /(1 + 0.0615)2029 period (11-1) = $12,102,063 When the discounted terminal value is calculated, it is then used as a sensitivity analysis where growth ‘g’ estimation is measured against the WACC. For Panoramic Resources, this valuation was useful to see how the growth of the cash flows will look using the Discounted Terminal Value. It gives a good insight regarding cash flows that should be included as a part of the valuation story. 5. Adam Forbis is evaluating Twinkle Inc. by using the FCFF and FCFE valuation approaches. Adam has collected the following information (in AUD): • Twinkle Inc. has net income of $450 million, depreciation of $100 million, capital expenditures of $200 million, and an increase in working capital of $50 million. • Twinkle Inc. will finance 35% of the increase in net fixed assets (capital expenditures less depreciation) and 40% of the increase in working capital with debt financing. • Interest expenses are $200 million. The current market value of Twinkle outstanding debt is $2,000 million. • FCFF is expected to grow at 5% percent indefinitely, and FCFE is expected to grow at 8% indefinitely. • Tax rate is 30%.• Twinkle Inc. is financed with 40% debt and 60% equity. The beforetax cost of debt is 9%, and the before-tax cost of equity is 14%. • Twinkle Inc. has 10 million outstanding shares. a) Using the FCFF valuation approach, estimate the total value of the firm, the total market value of equity, and the per-share value of equity. b) Using the FCFE valuation approach, estimate the total market value of equity and the per-share value of equity. FCFF = NI + non-cash expense + interest expense x (1-tax rate) – CAPEC – Investment in WCAP FCFF = 450+100 + 200 x (1 – 0.30) – 200 – 50 FCFF = 440 WAC = 9% (1-0.30)(0.40) + 14% (0.60) = 10.92% Firm Value = FCFF/ (WACC - g) = 440(1-0.60)/0.1092-0.06 = 14,309 Million The total value of equity is the total firm value minus the value of debt, Equity = 14,309,000,000 – 2,000,000,000 = $12,309,000,000. Dividing by the number of shares gives the per share estimate of V0 = $12,309,000,000/10,000,000 = $1,231 per share FCFE = NI + non cash expense – CAPEX – WCAP + Net Borrowing FCFE = 450 + 100 – 200 – 50 + 0.35 (200 – 100 + 50) = $ 375 Million the company is borrowing 35% of the increased net capital expenditure (200-100) and working capital (50), net borrowing is 52.5 million. The total value of equity is the FCFE discounted at the required rate of return on equity. Equity Value = FCFE (1+g)/r – g = 375 (1+0.08)/0.014-0.08 = $6,750 million6. What is Ohlson’s valuation model? You must define each parameter. Under what circumstances do we need to adjust Ohlson's model (i.e. core vs. non-core)? Ohlson’s earnings-valuation model shows the stock prices over a prolonged period and help investors look at predicting the future stock prices. With the use of this model, the most common approaches that are used include the cross-sectional approach and times series approach, there has been research to suggest the time series approach is to be the main emphasis. The time-series approach explains the relationship between the share prices, returns and with more in depth explanation of the relationship between the earnings, book value and other value relevant variables. Ohlson’s Model is the weighted average of capitalised earnings and the net assets. The parameter ‘k’ weights between earnings and net assets, the valuation parameters phi ‘(f)’ and gamma (g) (the Greek letters for g and g), value earnings (Xt) and net assets (Yt) respectively. Pt=k φXt+ (1-k)Yt earnings book value Pt= Price per share at time t. k= Weight 1 = all earnings, 0 = all book value. φ= Capitalisationrate for earnin