1) Given the information below for HooYah! Corporation, compute the expected sha

Question

1)

Given the information below for HooYah! Corporation, compute the expected share price at the end of 2011 using price ratio analysis. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

57.50

Share Price

P/E=

P/CF=

P/S=

5)

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.6, a debt-to-equity ratio of 0.4, a tax rate of 40 percent, and net income last year of $41 million. Assume a risk-free rate of 5 percent and a market risk premium of 12 percent. Included in net income was a depreciation expense of $5.1 million. In addition, Lauryn paid out $7.5 million in capital expenditures. Assume the company's FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm? (Enter your answer in millions. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

8)Given the information below for StartUp.Com, compute the expected share price at the end of 2011 using price ratio analysis. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Share price $

Year 2005 2006 2007 2008 2009 2010 Price 21.00

57.50

129.00 206.00 96.00 26.50 EPS -5.00 -4.29 -1.70 -.55 .04 .05 CFPS -12.00 -9.50 -2.70 -.10 .33 .20 SPS 18.00 26.50 24.60 28.10 31.60 34.95

Explanation / Answer

Hi,

There are three Questions included in this, let me answer your Question no. 5) ie Lauryn’s Doll Co

Answers is as follow,

Step 1 - Calculation of Free cash flows (FCF)

FCF = Net Income + on cash expenditure + net change in working capital - Capital expenditure

so FCF here is

Net income is 41 , non cash exp. is 5.1 & capital exp. is 7.5

therefore FCF = 41+5.1-7.5

FCF = 38.6

Step 2 Calculation of Cost of Capital (Ke)

cost of capital using CAPM method

Ke = Risk free rate + Beta * Risk premium

Ke = 5+ 1.6*12

Ke = 24.2%

Step 3 - calculation of cost of Debt (Kd)

since rate of interest is not given on debt , let us assume it to be 12%

Kd = interest * (1- tax)

Kd = 12% (1-0.4)

Kd = 7.2%

Step 4 :- Calculation of Weighted avg. cost of capital (WACC)

WACC = Kd * Debt equity ratio + Ke ( 1- debt equity ratio)

WACC = 7.2% * 0.4 + 24.2% * 0.6

WACC = 17.4%

Step 5 - Calculation of value of firm

using gorden theory

Value of Firm = FCF (1+g)/(wacc-g)

where g = growth

Value of firm = 38.6* (1+ 0.04)/ (0.174 - 0.04)

Value of firm = 299.58

Pls. note that here interest rate on debt was not mentioned so I have assumed it to be 12%, so accordingly the answer will change however concept remains the same

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