1. Prepare to explain the implications of case Exhibit 1 (Paige Simon’s first task). Based on that exhibit, is terminal value (TV) a material component of firm values? From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is often higher than the present value of near term cash flows, which means that a company's long-term cash-flow capacity is more important. 2. Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simon’s second task) |Approach |appropriate |inappropriate | |Book value |Depreciation (accounting) |When the book value is quite different from fair | | | |value | |Liquidation value |Bankrupt company (capital budgeting, cases like |Liquidation value will inappropriate for a company | | |machines, plants, natural resources projects, which |which is doing well, because it ignores “going | | |have definite lives) |concern” value. | | |firms in weird market conditions | | |Replacement Value |Fixed asset (like PP&E) |...

...approach, which means that the debt to equity ratio of AirThread will not be the same from 2008 to 2012, so APV approach would be more suitable to valuate the cashflows between 2008 and 2012.
After 2012, AirThread will de-lever to industry norm and thus, they will have a target leverage ratio; therefore WACC is best to estimate the terminalvalue.
Finally, regarding the valuation of non-operating investments in equity affiliates,...

...equity value are obtained by researchers while using the discounted cashflow model (CF) and the Residual income (RI) model. It recognises the inconsistencies prevalent while implementing them. Francis et al (2000) use Value line estimates for finite forecasting periods. They conclude that RI is superior to CF. Courteau et al (2000) analyse whether different valuation models are same when a terminalvalue...

...Calculate the TerminalValue
Having estimated the free cashflow produced over the forecast period, we need to come up with a reasonable idea of the value of the company's cashflows after that period - when the company has settled into middle-age and maturity. Remember, if we didn't include the value of long-term future cashflows, we would have to...

...Interco’s valuation as a whole. 2) As stated by the equity analysts, Interco is an over capitalized company with potential to grow, which makes an acquisition easy to finance. 3) Interco is also a cash generative target for a potential acquirer as it generates approximately $0.10 of operating cashflow for every dollar of sales. 4) The company is also structured in a way that it could be broken up and sold into its constituent parts, which could...

...2010 |
| Team “TerminalValue” [Kohler - BuSINESS DECISION] |
FIN 553 Spring Term 2010 |
Executive Summary
Both approaches (used to come up with the value of the Kohler Company) are greatly impacted by the assumptions made by both the company and the dissenting shareholders.
The use of the Market approach has shown that the value of the company varies greatly depending on the comparable companies. If Masco (which is the...

...Given the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points)
* From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cashflows or assets of AirThread....

...firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.
Our basic principle of stock valuation is that the value of a share of stock is simply equal to the present value of all of the expected dividends on the stock. According to the dividend growth model, an asset that has no expected cashflows has a value of zero, so if investors are willing to purchase shares of stock in firms...

...the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. You are strongly encouraged to use spreadsheets. Refer to Note on Sample CashFlow Template.
Question 1
(5 points) The project with the highest IRR is always the project with the highest NPV.
Your Answer | | Score | Explanation |
True | | | |
False | ✔ | 5.00 | Correct. Try now to...