1 FNCE30011 Essentials of Corporate Valuation TAKE HOME EXAM SEMESTER 1, 2021 INSTRUCTIONS This exam will be marked out of 10 and will count 10% to your overall mark in the subject. This exam must be undertaken on an individual basis which means you … • must prepare and submit your own work • must NOT solicit assistance from or give assistance to any person in completing this exam • must NOT discuss this exam with any other student enrolled in this subject, prior to release of the results for the entire class This is an open book exam which means you can use any notes, books or other materials on hand. There is no time limit but you need to submit it by the due date. The exam should be submitted using the Assignments tab on the class website on Canvas no later than 11:59 pm on Saturday 10 April 2021. Please submit your answer to question 1 using the “Take Home Exam – Q1” link and submit your answer to question 2 using the “Take Home Exam – Q2” link Your answers to the exam may be typed or neatly handwritten but must be submitted as pdf documents. You may use excel and include snapshots of your excel workings (with explanations of what you are doing) in your submitted pdfs – but do not submit an excel file. Recent versions of Microsoft Office allow you to save a word, excel or powerpoint document as a pdf document. Alternatively, you can download an app for your phone to scan your answers and save them as a pdf document. There are various apps available including Evernote Scannable or iScanner in the App Store for iOS phones and Genius Scan or Scan Smarter in the Play Store for Android phones. REQUIRED There are two questions worth a total of 10 marks. Answer both questions. The 500-word limit which applies to this exam excludes calculations. You should show sufficient workings and explanations to allow the grader to follow exactly what you are doing. Please ensure you include your name and student ID number on the first page of your answer to Q1 and on the first page of your answer to Q2. 2 QUESTION 1 (5 marks) You have just taken a graduate analyst position at a specialist valuation firm and one of the directors of the firm has asked for your assistance on a valuation she is undertaking for a client. In particular, she has asked for your opinion on the equity value of a five-year project which is expected to generate the following stream of unlevered free cash flow End of year 1 2 3 4 5 492 600 755 801 623 The unlevered cost of equity is 10% per annum, the cost of debt is 5% per annum and the corporate tax rate is 30%. All dollar amounts are in $ millions. Further, the project will be financed in accordance with the following target leverage ratio: End of year 0 1 2 3 4 5 60% 60% 60% 40% 20% - You decide to check with several friends as to which valuation model they would recommend … • Rick suggests you use the standard WACC model • Daryl suggests you use the vanilla WACC model • Michonne suggests you use the FCFE model (a) What should you say to each of Rick, Daryl and Michonne ? (b) What should you tell the director the project is currently worth ? (c) Is there anything else about your valuation that you should tell the director ? 3 QUESTION 2 (5 marks) So far things are going well for you as a graduate analyst at the specialist valuation firm. One your colleagues – Glenn – asks for your advice on a valuation he is working on. Specifically, Glenn has been asked to value the stock of Z Corporation. The company is currently generating annual FCFE of $0.20 per share and based on a 50% dividend payout ratio is currently paying an annual dividend of $0.10 per share. Glenn at first assumes Z Corporation will pay an annual dividend of $0.10 per share (in perpetuity) and using the DDM and a cost of equity of 10% per annum, comes up with a value of $1.00 per share. But he then thinks that an annual dividend of $0.15 per share (in perpetuity) may make more sense in which case he comes up with a value of $1.50 per share. Glenn is now not sure whether Z Corporation is worth $1.00 per share or $1.50 per share. What should you say to Glenn ?
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