INVESTMENTS (LL)
11th Edition
ISBN: 9781260150407
Author: Bodie
Publisher: MCG
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Chapter 18, Problem 16PS
a.
Summary Introduction
To calculate:The intrinsic value when GE’s P/E ratio starting in 2020 will be 16.
Introduction:
Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.
a.
Expert Solution
Answer to Problem 16PS
The intrinsic value when P/E ratio in the year 2020 is 16 will be $111868 and of FCFE will be $77595.80.
Explanation of Solution
Given information:
Spreadsheet 18.2 −
| 2016 | 2017 | 2018 | 2019 | 2020 | ||
| A.Input data | ||||||
| P/E | 14.35 | 14.25 | 14.17 | 14.08 | 14 | |
| Cap spending'shr | 2.65 | 2.7 | 2.82 | 2.93 | 3.05 | |
| LT Debt | 30000 | 28500 | 27333 | 26167 | 25000 | |
| Shares | 1800 | 1800 | 1798 | 1797 | 1795 | |
| EPS | 3.1 | 3.75 | 3.83 | 3.92 | 4 | |
| Working capital | 36825 | 37750 | 41173 | 44597 | 48020 | |
| Discount rate calculations | ||||||
| Current beta | 0.95 | |||||
| unlevered beta | 0.767 | |||||
| terminal growth | 0.02 | |||||
| tax_rate | 0.35 | |||||
| r.debt | 0.036 | |||||
| risk-free rate | 0.02 | |||||
| market risk premium | 0.08 |
The formulas to be entered in the cells are as follows:
After inputing the required value in the cell related to G3, we get the following values.
Therefore the intrinsic value when P/E ratio in the year 2020 is 16 will be $111868 and of FCFE will be $77595.80
b.
Summary Introduction
To calculate: The intrinsic value when GE’s unlevered beta is 0.80.
Introduction:
Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.
b.
Expert Solution
Answer to Problem 16PS
The intrinsic value of FCFF is $113972 and FCFE is $79038.50.
Explanation of Solution
Given information:
Spreadsheet 18.2 − Free cash flow model
| 2016 | 2017 | 2018 | 2019 | 2020 | ||
| A.Input data | ||||||
| P/E | 14.35 | 14.25 | 14.17 | 14.08 | 14 | |
| Cap spending'shr | 2.65 | 2.7 | 2.82 | 2.93 | 3.05 | |
| LT Debt | 30000 | 28500 | 27333 | 26167 | 25000 | |
| Shares | 1800 | 1800 | 1798 | 1797 | 1795 | |
| EPS | 3.1 | 3.75 | 3.83 | 3.92 | 4 | |
| Working capital | 36825 | 37750 | 41173 | 44597 | 48020 | |
| Discount rate calculations | ||||||
| Current beta | 0.95 | |||||
| unlevered beta | 0.767 | |||||
| terminal growth | 0.02 | |||||
| tax_rate | 0.35 | |||||
| r.debt | 0.036 | |||||
| risk-free rate | 0.02 | |||||
| market risk premium | 0.08 |
The formulas to be entered in the cells are as follows:
We need to change the vaue of unlevered beta from 0.767 to 0.80. After inputing the required value in the cell related to B22, we get the following values.
Therefore, the intrinsic value of FCFF is $113972 and FCFE is $79038.50.
c.
Summary Introduction
To calculate: Intrinsic value when the market risk premium is 7.5%
Introduction:
Unlevered Beta: This is also called as asset beta. It is one of the risk measurement unit which is used to compare the risk of company that doesnot have any debts with that of risk of the markets. In other words, risk of the company without dedts and risk of the market is compared.
c.
Expert Solution
Answer to Problem 16PS
The intrinsic value of FCFF will be$ 119921 and for FCFE it will be $83151.40.
Explanation of Solution
Given information:
Spreadsheet 18.2 − Free cash flow model
| 2016 | 2017 | 2018 | 2019 | 2020 | ||
| A.Input data | ||||||
| P/E | 14.35 | 14.25 | 14.17 | 14.08 | 14 | |
| Cap spending'shr | 2.65 | 2.7 | 2.82 | 2.93 | 3.05 | |
| LT Debt | 30000 | 28500 | 27333 | 26167 | 25000 | |
| Shares | 1800 | 1800 | 1798 | 1797 | 1795 | |
| EPS | 3.1 | 3.75 | 3.83 | 3.92 | 4 | |
| Working capital | 36825 | 37750 | 41173 | 44597 | 48020 | |
| Discount rate calculations | ||||||
| Current beta | 0.95 | |||||
| unlevered beta | 0.767 | |||||
| terminal growth | 0.02 | |||||
| tax_rate | 0.35 | |||||
| r.debt | 0.036 | |||||
| risk-free rate | 0.02 | |||||
| market risk premium | 0.08 |
The formulas to be entered in the cells are as follows:
We need to change the vaue of unlevered beta from 0.08 to 0.075. After inputing the required value in the cell related to B27, we get the following values.
Therefore the intrinsic value of FCFE will be$ 119921 and for FCFE it will be $83151.40.
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Students have asked these similar questions
Using the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts.
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Winterhold Publishing House
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Chapter 18 Solutions
INVESTMENTS (LL)
Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - Prob. 4PSCh. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Prob. 8PSCh. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 5CPCh. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CP
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