CFVG 6

Corporate finance
Etienne Redor
eredor@audencia.com
S C H O O L O F M A N A G E M E N T
CFVG
Part 2: Stock valuation
CFVG
The discounted-dividend model
If we value a stock from its future cash flows, we face

two problems:
– Contrary to bonds, stocks don’t have a fixed

lifetime.
– The resale price and the dividends are unknown.
To calculate the present value of a stock, we need to

discount an infinite number of unknown cash flows …
which is of course impossible
Single period model
The monetary incomes from a shareholder arise

from two sources :
• The dividends
• The capital gains (or losses)
Therefore, the rate of return that investors expect

is given by :
Div1  P1 - P0
r
P0
Exercise
•Exercise
•
• A year ago, you bought, 7
shares of Cravatex inc. On that date,
the firm’s stock price was $140.
Today, you sell your 7 shares
In other words, we pay 1% brokerage fees at the purchase and at the
whereas the stocksale.price is $162. In
the meantime, you have received a
dividend of $8. What is the
profitability of this portfolio line
given that brokerage fees amount to
Answer
Exercise
Since the 7 shares are identical, the profitability of one share is
equal to the profitability of the portfolio line. In other words, it
is the same thing to reason for one share or for seven.
The net purchase price is given by:
P0= 140×1.01= $141.4
The net selling price is given by:

P1= 162×0.99= $160.38
Since the dividend is $8, the line portfolio’s profitability is given

by:
Div1  P1  P0 8  160.38  141.4

r   19.08%
P0 141.4
Exercise
An investor expects that RAST’s share will be worth P 1 = $110

in one year and that the dividend will be D1= $5.
What is the price of the share today, if the investor demands a
rate of return of 15% ?
D1  P1
P0   $100
1 r
What would happen if P0 was not worth $100 on financial
markets?
Two periods model
The investor who will buy the share in one year will do the
same calculation :
D 2  P2
P1 
1 r
If we replace in the previous formula:
D 2  P2
D1 
D1  P1 1  r D1 D 2  P2
P0    
1 r 1 r 1  r (1  r ) 2
Multi period model
D 3  P3
D2 
(1  r )
D1 
D1  P1 (1  r ) D1 D2 D3 P3
P0      
1 r 1 r 1  r (1  r ) 2
(1  r ) (1  r ) 3
3
If we generalize, we obtain :
H
Dt PH
P0   
t 1 (1  r ) t
(1  r ) H
What is the limit of this function when H tends to infinity?

Multi period model
H Future Future value Present value of Present Total
value of of stock the dividend’s value of
Dividends price sum stock price
0 0 100 100
1 5 110 4.35 95.65 100
10 11.79 259,37 35.89 64.11 100
100 62,639.15 1,378,062.23 98.83 1.17 100
With dividends and stock prices increasing in 10% a year and

discount rate of 15%

D1 D2 D3 Dt
P0   
1  r (1  r ) 2 (1  r ) 3
 ...  
t 1 (1  r ) t
The stock price is equal to the present value of the expected

future dividends it will pay.
Gordon-Shapiro model
•Assumption :
Dividends DDk grow
D  (at ag )constant rate (g% a
1
2 1
year)
D3  D2  (1  g )  D1  (1  g ) 2
Dn  Dn 1  (1  g )  D1  (1  g ) n 1
Example :
D1 = 7 € and dividends grow at g = 2% a
year
D1 = 7 €
Gordon-Shapiro model

D1 D2 D3 Dt
• P0   
Then 1  r (1  r) 2 (1  r)3  ...  
t 1 (1  r ) t
• becomes
P0  1  : 1
D D  (1  g ) D  (1  g ) 2 
D  (1  g ) t 1
1 r (1  r ) 2
 1
(1  r ) 3
 ...  
t 1
1
(1  r ) t
• D1
P0 
• rg
which can be simplified by :
Gordon-Shapiro formula/
Constant growth perpetuity formula
Exercise
•Exercise
•
• Genifrance inc. will pay next
year a dividend of $4 per share.
Then you expect a dividend increase
of 3% a year for ever. Given that you
demand a rate of return of 10% on
this investment, what price will you
accept to pay for this share ?
Answer
Exercise
We try to value the theoretical price of a share under the
assumption of a constant growth of dividends. To this end, we
use the Gordon-Shapiro’s model. The price of this share is
given by the following formula :
D1 4
P0    $57.14
k  g 10%  3%
According to Gordon-Shapiro’s model, the price of this stock is

$57.14.
Price Earning Ratio
The Price Earning Ratio is simply the company's stock price

divided by the company's earnings per share:
stock price market value of equity
PER  
EPS total earnings
The P/E ratio gives you an indication of what the market is
willing to pay for the company’s earnings.
In practice, we will study the P/E ratio of a stock in comparison
with the mean P/E ratio of firms in the same industry
Some people believe that a company with a high PER ratio is
expensive and that it a signal of overvaluation.
The P/E ratio in an expensiveness indicator : if the firm

has a P/E ratio lower than the P/E ratio of the industry, its
share is cheap and should therefore be bought.
Exercise
•Exercise
•You decide to invest in the banking
industry. You hesitate between different
stocks withStock theDividendmainDividendcharacteristics
Number of Expected
price distribution growth rate stocks earnings
given in the following rate table:
Vietnam Bank 15 50 % 4% 25,000,000 50,000,000
HCMC Bank 80 80 % 5% 30,000,000 270,000,000
South Bank 60 80 % 2% 16,000,000 120,000,000
My Bank 35 50 % 3% 20,000,000 100,000,000
National Bank 42 90 % 3% 20,000,000 90,000,000
Exercise
•Exercise
• a) Given that the mean P/E ratio
in the banking industry is 8, in
which shares will you invest?
Remember that the P/E ratio in an
expensiveness indicator : if the firm
has a P/E ratio lower than the P/E
ratio of the industry, its share is
cheap and should therefore be
bought.
Answer
Exercise
Stock price Number of Expected Earnings Per P/E
stocks earnings Share
Vietnam Bank 15 25,000,000 50,000,000 2 7.5
HCMC Bank 80 30,000,000 270,000,000 9 8.89
South Bank 60 16,000,000 120,000,000 7.5 8
My Bank 35 20,000,000 100,000,000 5 7
National Bank 42 20,000,000 90,000,000 4.5 9.33
Vietnam Bank and My Bank: Undervalued

HCMC Bank and National Bank: Overvalued
South Bank: Fairly priced
Answer
Exercise
Stock Earnings Dividend Expected Dividend Theoretical
price Per Share distribution dividend growth rate stock price
according to
rate
Gordon-
Shapiro
Vietnam 15 2 50 % 1 4% 12.5
Bank
HCMC Bank 80 9 80 % 7.2 5% 102.86
South Bank 60 7.5 80 % 6 2% 60
My Bank 35 5 50 % 2.5 3% 27.78
National 42 4.5 90 % 4.05 3% 45
Bank
HCMC and National Bank: Undervalued

Vietnam Bank and My Bank: Overvalued
South Bank: Fairly priced
Answer
Exercise
According to the P/E ratio, we should invest in Vietnam Bank
and in My Bank. On the contrary, according to Gordon-
Shapiro’s model, we should invest in HCMC Bank and in
National Bank. The results are mixed.
It is important to note that both of those tools are models

based on strong assumptions (Is it adequate to assume an
infinite constant growth of the dividends for those banks in the
Gordon-Shapiro’s model?). They allow to help in the decision
making of investors but does not ensure to realize capital
gains.
CAPM
•The Capital Asset Pricing Model

(CAPM) allows to quantify the
relationship between risk and return
and to estimate
E(Ri) = Rf + bthe
(Rm –risk
Rf) premium
demanded by an investor.
E(Ri) = The expected return on the capital asset
Rf = The risk-free rate
Rm = The expected return of the market
b = Risk coefficient of the asset (systematic risk)
CAPM
Expected
return Capital market
line High tech
firms
development
stage company
Large firm
Risk free rate
b=1
Market risk Risk
What is the β ?
The β coefficient is a sensitivity index. It is a number

describing the relation of stock’s or portfolio’s returns
with those of the financial market as a whole. It is higher
than 1 when the stock amplifies the market variations,
and lower than 1 when it eases them.
It can be calculated as follows :
covariance (Ri, Rm)

bi = -----------------------
variance (Rm)
In concrete terms: If a stock has a β of 1.5, it means that it

will increase (or decrease) in 15%, when the market will
increase (or decrease) in 10%.
Use of the CAPM
If a stock is above the security market line, it means that :
 Its expected return is higher than the one theoretically expected with
this b : The stock is undervalued.
If a stock is under the security market line, it means that :

 Its expected return is lower than the one theoretically expected with
this b : The stock is overvalued.
Undervalued
stocks
Overvalued
stocks
Exercise
•Exercise
• Your best friend is asking your
opinion concerning its investments.
He has identified 5
Expected returns stocks.
according to the analysts
After
Systematic risk
(β)
doingSodaphone
some research, 16 % he
1.6 has
Decomod 12 % 0.8
obtained
Rebierthe following
9.3 % information
0.6 :
Goubany 10 % 1.2
Grizzly corp 5% 0.2
Answer
Exercise
Expected returns Systematic Expected returns

according to the risk according to
analysts CAPM
(β)
Sodaphone 16 % 1.6 14.8 %
Decomod 12 % 0.8 10.4 %
Rebier 9.3 % 0.6 9.3 %
Goubany 10 % 1.2 12.6 %
Grizzly 5% 0.2 7.1 %
Corp.
Sodaphone et Decomod : Undervalued

Goubany et Grizzly Corp. : Overvalued
Rebier : Fairly priced
Exercise
Exercise
Sebana Hauspie
Expected returns according to the analysts 8% 10 %
Earnings $7,500,000 $12,000,000
Expected dividend for next year $2 $3
Standard deviation of returns 24 % 20 %
Systematic risk (β) 1.3 0.8
Current stock price $80 $120
Number of shares outstanding 750,000 1,000,000
Dividend growth rate at the infinite 4% 3%
Book value of equity $75,000,000 $100,000,000
Sales $325,000,000 $500,000,000
You also know that the historical risk-free rate is 4.5%, that the
mean P/E ratio of this industry is 9 and that the historical return
of the market is 8 %.
Exercise
•Exercise
• a) Calculate the P/E ratio of
both firms. According to this
criterion, in which share(s) do you
invest?
•
• b) Given that the investor
demands a rate of return of 6%,
calculate the theoretical stock price
of both of those shares according to
Answer
a) Sebana :
7,500,000
EPS   $10
750,000
Therefore, the PER of this firm is :
80
PER  8
10
Hauspie :
12,000,000
EPS   $12
1,000,000
Therefore, the PER of this firm is :
120
PER   10
12
Since the average P/E ratio of this industry is 9, Sebena’s share
is undervalued whereas Hauspie’s share is overvalued.
Answer
b) The theoretical stock price of Sebena is :

D1 2
P0    $100
k  g 6%  4%
Since the current stock price of Sebena is $80, the stock is

currently undervalued.
The theoretical stock price of Hauspie is :

D1 3
P0    $100
k  g 6%  3%
Since the current stock price of Hauspie is $120, the stock is
currently overvalued.
Answer
c) According to CAPM, the expected return of Sebena is :
According to CAPM, Sebena’s stock is overvalued because the

expected return of the model is higher than the one expected
by the analysts.
According to CAPM, the expected return of Hauspie is:
According to CAPM, Hauspie’s stock is undervalued because

the expected return of the model is lower than the one
expected by the analysts.
Chapter 5: Firm valuation
CFVG
The Discounted Cash Flow model
CFVG
Firm value
- To value an asset, we have to forecast the expected cash
flows over its life.
- This can become a problem when valuing a publicly traded
firm, which at least in theory can have a perpetual life.
- In discounted cash flow models, we usually resolve this
problem by estimating cash flows for a period (usually
specified to be an extraordinary growth period) and a terminal
value at the end of the period.
t n
FCFt Vn
V0   
t 1 (1  r ) (1  r ) n
t
Exercise
Electrosign is a firm specialized in the manufacturing of lights. This year it
should have sales of $1,234 million and an EBIT of $185.1 million. The
financial debts will be about $417.4 million and the cost of debt about 6.2
%. The management of the firm wants to maintain a financial leverage of 25
% which corresponds to a capital structure made of 20 % of debts and of
80 % of equity.
The following hypotheses are made for the next five years:
- The sales should increase by 7 % during 2 years, by 6 % during the 2
following years, by 5 % the fifth year and then by 4 %.
-The operating margin=EBIT/Sales will be 15 % this year, 15.5% year N+1,
and then should stabilize at 16%.
- Capital expenditures correspond to 2.5% of the sales, the depreciations
and amortisations to 2% of the sales and the changes in working capital
are given by the following table:
N N+1 N+2 N+3 N+4 N+5

Changes in Working Capital 13.8 14.8 13.6 14.4 12.7 10.7
- The tax rate is assumed to be 33%
How to compute a CF?
First step: Determine the NOPAT
Sales
To do this, we take into account the - Operating charges
sales and we subtract the different - Other charges
charges in order to obtain the EBITDA.
Once we deduced the depreciations, EBITDA
the amortizations and the tax, we
- Depreciations and
obtain the NOPAT
amortizations
EBIT
- Tax
NOPAT
How to compute a CF ?
Second step: compute the operating cash flow
To compute the NOPAT we have to deduce NOPAT
the depreciations and amortisations.
Nevertheless, since it is a non-cash + Depreciations and
expense, we have to take it into account in amortisations
the computation of the operating cash flow. - Change in working
Moreover, accounts receivable, inventories capital requirements
and accounts payable will increase, which
will have a direct impact on working capital Operating
requirements. Therefore, change in working cash flow
capital requirements has to be taken into
account (and not the working capital
requirements !!!)
Reminder:
Working capital requirements=Accounts receivable + Inventories – Accounts payable
How to compute a CF ?
Third step: compute the net cash flow
Operating
To obtain the net cash flow, we also
cash flow
have to take into account the cash
flows not linked to firm’s operation - Capital expenditures
(here only the capital expenditures + Equipment’s sale
each year since a firm is supposed to - Capital gain tax on
have a perpetual life!!!) the equipment’s sale
+ WCR recovery
Net cash
flow
Computation of the free cash flows
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
×1,07 ×1,07 ×1,06 ×1,06 ×1,05

N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
15% 15,5% 16% 16% 16% 16%
EBIT 185.1 204.7 226 239.6 254 266.7
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
33% 33% 33% 33% 33% 33%
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
Dep. & 24.7 26.4 28.3 30 31.7 33.3
Amort.
2 % OF SALES
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
Dep. & 24.7 26.4 28.3 30 31.7 33.3
Amort.
-Change -13.8 -14.8 -13.6 -14.4 -12.7 -10.7
in working
capital
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
Dep. & 24.7 26.4 28.3 30 31.7 33.3
Amort.
-Change -13.8 -14.8 -13.6 -14.4 -12.7 -10.7
in working
capital
Operating 134.9 148.7 166.2 176.1 189.2 201.3
cash flow
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
Dep. & 24.7 26.4 28.3 30 31.7 33.3
Amort.
-Change -13.8 -14.8 -13.6 -14.4 -12.7 -10.7
in working
capital
Operating 134.9 148.7 166.2 176,1 189.2 201,3
cash flow
- CAPEX. -30.9 -33 -35.3 -37.4 -39.7 -41.7
2.5 % OF SALES
N N+1 N+2 N+3 N+4 N+5

Sales 1,234 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 185.1 204.7 226 239.6 254 266.7
Tax -61.1 - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 124 137.1 151.5 160.5 170.2 178.7
Dep. & 24.7 26.4 28.3 30 31.7 33.3
Amort.
-Change -13.8 -14.8 -13.6 -14.4 -12.7 -10.7
in working
capital
Operating 134.9 148.7 166.2 176,1 189.2 201,3
cash flow
- CAPEX. -30.9 -33 -35.3 -37.4 -39.7 -41.7
FCF 104 115.7 130.8 138.7 149.5 159.7
Firm value
We have determinated the free cash flows for the next five
years…
t n
FCFt Vn
V0   
t 1 (1  r ) t
(1  r ) n
We know We need to
the FCF… know r…
We need to determine the discount rate to determine the present

value of the FCF…
WACC
In order to value the firm, we have to discount these cash-
flows.
We use the Weighted Average Cost of Capital (WACC), which is
the rate of return required by the providers of funds
(shareholders and creditors) to finance the company’s
investment projects, to discount the cash-flows.
WACC is given by:
D E
WACC  i  (1   )   R
DE DE
With i, the cost of debt;
τ, the tax rate
D, the market value of Debt
E, the market value of Equity
R, the cost of equity
The cost of equity
D E
WACC  i  (1   )  cv  R  cv
DE DE
6.2 % 33 %
0.2 0.8
WACC =6.2 % × ( 1− 0.33 ) × 0.2+ R × 0.8

The main problem here is to determine the cost of equity, which
is not directly observable.
Generally we use the Capital Asset Pricing Model (CAPM) to

find the cost of equity.
CAPM
• The Capital Asset Pricing Model (CAPM) allows to

quantify the existing relationship between risk and returns and
to value the risk premium demanded by an investor.
E(Ri) = Rf+ β ×(Rm-Rf)
With: E(Ri) = expected return on the capital asset

Rf = current risk-free rate
E(Rm) = expected return on the market
β= the sensitivity of the expected excess asset returns to the expected excess
market returns
The WACC of Electrosign
According to the following information, compute the cost of

equity of Electrosign:
Risk free rate=4.25 %

The historical return of the market : 9.25 %
β Electrosign=1.43
The cost of equity of Electrosign is therefore 11.4 %.
Deduce the WACC of Electrosign
WACC =6.2 % × ( 1− 0.33 ) × 0.2+ R × 0.8
The WACC of Electrosign is therefore 9.95 %.

N N+1 N+2 N+3 N+4 N+5

Sales 1,320.4 1,412.8 1,497.6 1,587.4 1,666.8
EBIT 204.7 226 239.6 254 266.7
Tax - 67.5 -74.6 -79.1 -83.8 -88
= NOPAT 137.1 151.5 160.5 170.2 178.7
Dep. & 26.4 28.3 30 31.7 33.3
Amort.
-Change -14.8 -13.6 -14.4 -12.7 -10.7
in working
capital
Operating 148.7 166.2 176,1 189.2 201,3
cash flow
- CAPEX. -33 -35.3 -37.4 -39.7 -41.7
FCF 115.7 130.8 138.7 149.5 159.7
The present value of FCF
The present value of free cash flows for Electrosign is given by:
115 .7 130.8 138.7 149.5 159.7

PVFCF   2
 3
 4
 5
 519.46
1.0995 1.0995 1.0995 1.0995 1.0995
Residual value and Firm value
We have determinated the present value of the cash flows of

Electrosign for a time horizon of five years…
t n
FCFt Vn
V0   
t 1 (1  r ) t
(1  r ) n
We know We need to
this… know this…
The most consistent way of estimating terminal value in a

discounted cash flow model is to assume that cash flows will
grow at a stable growth rate that can be sustained forever after
the terminal year.
Reminder :
The present value of an asset generating a growing perpetuity

free cash flow is given by :(if the required rate of return r >
annual payment growth rate g)
CFt 1
Vt 
rg
Compute V5 (the firm’s residual value in five years) if we suppose
that Electrosign can generate a growing perpetuity free cash flow of
4% from the sixth year.
CF6 CF5  (1  g )
V5   
WACC  g WACC  g
Reminder :
The present value of an asset generating a growing perpetuity

free cash flow is given by :(if the required rate of return r >
annual payment growth rate g)
CFt 1
Vt 
rg
Compute V5 (the firm’s residual value in five years) if we suppose
that Electrosign can generate a growing perpetuity free cash flow of
4% from the sixth year.
CF6 CF5  (1  g ) 159.7  (1  0.04)

V5     2,791.39
WACC  g WACC  g 0.0995  0.04
Compute the present value of the residual value

V5 2,791.39
PV    1,737.18
(1  r ) 5
(1  0.0995) 5
Deduce the firm value

t n
FCFt Vn
V0   
t 1 (1  r ) t
(1  r ) n
V 0  519.46  1,737.18  2,256.64

Firm value and firm's equity value
Firm value is 2,256.64.
Firm value is different from firm's equity value because firm

value is based on the cash flows due to both shareholders and
creditors.
Thus, an acquirer who would buy Electrosign should pay (if we

suppose that the book value of debt is equal to market value of
debt) :
Firm value 2,256.6
Debt value - 417.4
Equity value 1,838.8
Labour case study
CFVG
Answer
1st Step: Compute the FCF
N+1 N+2 N+3 N+4 N+5

Daily price of a room (1)
Occupancy rate of rooms (2)
Annual sales ($M)
 (1)  (2)  365  9000

 (1)  (2)  number of days  number of rooms
Answer
N+1 N+2 N+3 N+4 N+5

Daily price of a room 312 324.48 337.46 350.96 365
1,04
Answer
N+1 N+2 N+3 N+4 N+5

Daily price of a room 312 324.48 337.46 350.96 365
Occupancy rate of rooms 62% 64% 66% 68% 70%
+2%
Answer
N+1 N+2 N+3 N+4 N+5

Daily price of a room (1) 312 324.48 337.46 350.96 365
Occupancy rate of rooms (2) 62% 64% 66% 68% 70%
Annual sales ($M) 635.5 682.2 731.6 784.0 839.3
 (1)  (2)  365  9000

 (1)  (2)  number of days  number of rooms
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) 635.5 682.2 731.6 784.0 839.3
EBITDA to sales ratio 25% 26% 27% 28% 29%
+1%
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA to sales ratio (4) 25% 26% 27% 28% 29%
EBITDA 158.9 177.4 197.5 219.5 243.4
 (3)  (4)
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA 158.9 177.4 197.5 219.5 243.4
Depreciations 70 70 70 70 70
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
Depreciations (6) 70 70 70 70 70
EBIT 88.9 107.4 127.5 149.5 173.4
 (5)  (6)
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax 30.2 36.5 43.4 50.8 59
 (7)  0.34
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT 58.7 70.9 84.1 98.7 114.4
 (7)  (8)
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT 58.7 70.9 84.1 98.7 114.4
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT 58.7 70.9 84.1 98.7 114.4
Working capital 17.4 18.7 20.0 21.5 23.0
 (3)  10 / 365
Answer
N+1 N+2 N+3 N+4 N+5

Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT 58.7 70.9 84.1 98.7 114.4
Working capital 17.4 18.7 20.0 21.5 23.0
Change in working capital * 1.2 1.3 1.4 1.4 1.5
(rounded)
* By computation, we have working capital N= 16.2 and working capital N+6 =24.6
Answer
N+1 N+2 N+3 N+4 N+5
Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT (9) 58.7 70.9 84.1 98.7 114.4
Working capital 17.4 18.7 20.0 21.5 23.0
Change in working capital 1.2 1.3 1.4 1.4 1.5
(rounded) (10)
Operating cash-flow 127.5 139.6 152.7 167.3 182.9
Answer
N+1 N+2 N+3 N+4 N+5
Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT (9) 58.7 70.9 84.1 98.7 114.4
Working capital 17.4 18.7 20.0 21.5 23.0
Change in working capital 1.2 1.3 1.4 1.4 1.5
(rounded) (10)
Operating cash-flow 127.5 139.6 152.7 167.3 182.9
CAPEX 80 80 80 80 80
Answer
N+1 N+2 N+3 N+4 N+5
Annual sales ($M) (3) 635.5 682.2 731.6 784.0 839.3
EBITDA (5) 158.9 177.4 197.5 219.5 243.4
EBIT (7) 88.9 107.4 127.5 149.5 173.4
Tax (8) 30.2 36.5 43.4 50.8 59
NOPAT (9) 58.7 70.9 84.1 98.7 114.4
Working capital 17.4 18.7 20.0 21.5 23.0
Change in working capital (10) 1.2 1.3 1.4 1.4 1.5
Operating cash-flow (11) 127.5 139.6 152.7 167.3 182.9
CAPEX (12) 80 80 80 80 80
Free Cash Flow 47.5 59.6 72.7 87.3 102.9
 (11)  (12)
Answer
2nd Step: Compute the WACC
D E
WACC  i  (1   )   R
DE DE
4,2% 34% 321 1070
We need to know R, the cost of equity…
The cost of equity is 8.46%
We can deduce from this that the WACC of the firm:
321 1,070
𝑊𝐴𝐶𝐶 =4.2 % × ( 1− 34 % ) × +8.46 % × =7.15 %
321+1,070 321+1,070
Answer
3rd Step: Compute the present value of the FCF
4th Step: Compute the firm’s residual value
5th Step: Compute the present value of the residual value

𝑉 5 2,038.02
𝑃𝑉 = 5
= 5
=1,442.94
(1 + 𝑟 ) (1 +0.0715 )
Answer
6th Step: Compute the firm value
t n
FCFt Vn
V0   
t 1 (1  r ) t (1  r ) n
𝑉 0 = 294.42 +1,442.94 =1,737.36
7th Step: Compute the Equity value
8th Step: Compute the Stock price
1,416.36
Stock price = =128.76
11

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Corporate finance

If we value a stock from its future cash flows, we face

– Contrary to bonds, stocks don’t have a fixed

– The resale price and the dividends are unknown.

To calculate the present value of a stock, we need to

The monetary incomes from a shareholder arise

Therefore, the rate of return that investors expect

The net selling price is given by:

Since the dividend is $8, the line portfolio’s profitability is given

Div1  P1  P0 8  160.38  141.4

An investor expects that RAST’s share will be worth P 1 = $110

What is the limit of this function when H tends to infinity?

1 5 110 4.35 95.65 100

10 11.79 259,37 35.89 64.11 100

100 62,639.15 1,378,062.23 98.83 1.17 100

With dividends and stock prices increasing in 10% a year and

The stock price is equal to the present value of the expected

According to Gordon-Shapiro’s model, the price of this stock is

The Price Earning Ratio is simply the company's stock price

The P/E ratio in an expensiveness indicator : if the firm

Vietnam Bank and My Bank: Undervalued

HCMC and National Bank: Undervalued

It is important to note that both of those tools are models

•The Capital Asset Pricing Model

Risk free rate

The β coefficient is a sensitivity index. It is a number

It can be calculated as follows :

covariance (Ri, Rm)

In concrete terms: If a stock has a β of 1.5, it means that it

If a stock is under the security market line, it means that :

Expected returns Systematic Expected returns

Sodaphone et Decomod : Undervalued

b) The theoretical stock price of Sebena is :

Since the current stock price of Sebena is $80, the stock is

The theoretical stock price of Hauspie is :

c) According to CAPM, the expected return of Sebena is :

According to CAPM, Sebena’s stock is overvalued because the

According to CAPM, the expected return of Hauspie is:

According to CAPM, Hauspie’s stock is undervalued because

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

×1,07 ×1,07 ×1,06 ×1,06 ×1,05

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

N N+1 N+2 N+3 N+4 N+5

We need to determine the discount rate to determine the present

WACC =6.2 % × ( 1− 0.33 ) × 0.2+ R × 0.8

Generally we use the Capital Asset Pricing Model (CAPM) to

• The Capital Asset Pricing Model (CAPM) allows to

E(Ri) = Rf+ β ×(Rm-Rf)

With: E(Ri) = expected return on the capital asset

According to the following information, compute the cost of

Risk free rate=4.25 %

The cost of equity of Electrosign is therefore 11.4 %.