Student ID:
Institut für Strategische
Unternehmensführung und
Finanzierung
Lehrbeauftragter
Dr. Stefan Gros
MA - Theory and Practise of Business Valuation
Test Exam Date 09th February 2013
Student ID:
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Semester:
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Instructions
• Keep the Exam-booklet as it is. Use back pages if necessary.
• Start with the Front page
• Write your student ID/matriculation number on all sheets at the right top.
• Check whether your booklet has 14 sheets.
• The exam (90 minutes) consists of tasks, which all need to be solved. Master
Students will have additional tasks in Chapter IV.
• Results can be rounded, one digit i.e. 10,6 for 10,63345654.
• Write your solution directly below the task. If necessary use the back page.
• Demonstrate the approach that leads to your results. This also applies to multiple
choice questions!
• Multiple choice questions are to be solved by ticking the right answer.
• Calculators can be used.
• Please leave the exam on your table. It will be collected.
Dr. Gros and the Team wish you SUCCESS!
Total Points:
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Score:
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1
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I. Topic: Valuation Techniques
105 Points in total
1) Frameworks for Valuation
1a) Which of the following valuation methods does not assume the WACC is
constant? Choose the right answer!
A: The discounted cash flow model
B: The economic-profit model
C: The adjusted present value model
D: None of these. They all assume the WACC is constant.
(5 Points)
1b) The APV model uses the following breakdown to value the firm:
Adjusted Present value = Enterprise value as if all equity financed +
Present value of Tax shields. The value of equity = Disc. Economic
profit+ invested capital + non-operating assets – non equity claims.
A firm’s estimated present value of economic profit is € 250 Mio. Its
estimated invested capital is €350 Mio. It has cash holdings of € 56 Mio.
The value of debt and capitalized operating leases are € 100 Mio. and
€26 Mio., respectively. What is the estimated value of equity?
(5 points)
2
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2) Reorganizing the Financial Statements
Given the following financial statements, calculate NOPLAT, Working Capital,
invested capital and total funds invested.
INCOME
STATEMENT
Revenues
Cost of Sales
Selling Costs
Depreciation
Operating
Profit
YEAR
BALANCE SHEET
200,0
(80,0)
(50,0)
(20,0)
50,0
Working cash
Accounts Receivable
Inventories
Current assets
Interest Expense
Gain on sale
Earnings before
Taxes
Net income
(4,0)
(13,8)
Property, Plant and Equipment
Prepaid pension assets
Total assets
Operating tax
rate
Marginal tax
rate
YEAR
10
30
10
50
150
5
205
32,2
Accounts payable
Short-term debt
Restructuring reserves
Current liabilities
6
12
7
25
Long-term debt
70
20%
20%
Shareholders Equity
Liabilities and equity
110
205
(5 Points)
3
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3) Estimating Continuing value
An Analyst is estimating the continuing value after the explicit forecast period
using the economic-profit formula. The analyst estimates that invested capital at
the end of the explicit forecast period will be € 3.000 and the ROIC on existing
capital after the explicit forecast period will be 14 percent. NOPLAT in the year
following the explicit forecast period is expected to be €600 and is expected to
grow at 1 percent per year. The RONIC is expected to be 10 percent, and the
cost of capital is 6 percent.
What is the continuing value (CV) after the explicit forecast period?
(10 Points)
4) Cost of Capital:
a) SP Automotive is a Brazilian supplier to OEM car producers worldwide, based on
a patented special part for diesel engines. Over the past year, profitability has
been strong and the share price has risen from R$15 per share to R$25 per
share. The company has 20 million shares outstanding. The companies’
borrowing is conservative; the company has only R$100 Mill. of debt. The debt
trades at a yield to maturity 50 basis points above Brazilian risk free bonds. SP
Automotive has a market beta of 0.8. If the Brazilian risk free rate is 5 percent,
the market risk premium is 5 percent and the marginal tax rate is 15 percent,
what is SP Automotive’s cost of capital?
(5 points)
4
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4)
b) SP Automotive is considering a leveraged recapitalization of the company. Upon
announcement, management expects the share price to rise by 10 percent. If
the company raises R$200 Mio. in new debt to repurchase shares can the
company repurchase? Assuming management will actively manage the new
capital structure, estimate the company‘s new market beta. If the company‘s
cost of debt rises to 100 basis points above the Brazilian risk-free rate, what will
its new cost of capital equal? (5 points)
c) Your company, Ingolstadt World AG has announced its intention to purchase
SP Automotive (see question 1). If the german risk free rate is 2 percent and
the beta of Ingolstadt World AG is 0,9. What is the cost of capital for SP
Automotive once under Ingolstadt World AGs control? (5 points)
d) In 2011, the median price earnings ratio for the S&P500 was 11.1., if the long
run return on equity is 15 percent and the long-run growth in GDP is expected
to be 5,7% (3,5 real growth and 3,2% inflation), what is the real cost of
equity implied by the equity-denominated key value driver formula? (5 points)
5
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5) Moving from Enterprise to Equity Value
a) Nordwind Plc. manufactures, markets, and distributes wind mills for energy
production. Using discounted free cash flow, you value the company‘s
operations at €4.500 Mio. The company has a 20% stake in a non
consolidated subsidiary. The subsidiary is valued at €1.000 Mio. The
investment is recorded on Nordwind Plc‘s balance sheet as an equity
investment of €100 Mio. Nordwind Plc. is looking to increase its ownership.
The company‘s marginal tax rate is 25%.
Based on this information, what is Nordwind Plc.‘s enterprise value? If new
management announced its plan to sell the company‘s stake in the subsidiary at
its current value, how would that change your valuation?
(5 points)
b) Nordwind Plc. has unfunded pension liabilities value at €200 Mio., recorded as
a long term liability. Nordwind Plc. has detailed a potential legal judgement of
€100 Mio. for defective engines in its annual report. Since Management
estimates a 90% likelihood the judgement will be enforced against the engine
maker and not Nordwind Plc., they did not report a liability on the balance
sheet. The company‘s marginal tax rate is 25%. If Nordwind Plc.‘s enterprise
value is €4.800 Mio, what is Nordwind Plc.‘s equity value?
(5 points)
6
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To finance customer purchases, Nordwind Plc. recently started a customer
financing unit. Nordwind‘s income statement and balance sheet are provided:
$ million
Income statement
Sales of machinery
Revenues of financial products
Total revenues
Cost of goods sold
Interest expense of financial products
Total operating costs
Operating profit
Interest expense, general obligation
Net income
1.500
400
1.900
-1.000
-350
-1.350
550
-80
470
Balance sheet
Operating assets
Financial receivables
Total assets
2.200
4.000
6.200
Operating liabilities
General obligation debt
Debt related to customer financing
Stockholders' equity
Total liabilities and equity
400
–
3.600
2.200
6.200
5)
c) Separate Nordwind Plc.‘s income statement and balance sheet into two
segments: manufacturing and customer financing unit. Assume equity in the
financing subsidiary is the difference between finance receivables and the
debt related to those receivables. What is the return on invested capital for
the manufacturing segment? What is the return in equity for the customer
financing subsidiary?
(5 points)
d) In Question c, we calculated ROE based on an equity calculation equal to the
difference between receivables and the debt related to those receivables.
What might this ROE measurement lead to a result that is too high?
(5 points)
7
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6) Calculating Results and Scenarios
You are valuing Distress Co., a company struggling to hold market share. The
company currently generates €120 Million in revenue, but its revenue is
expected to shrink to €100 Million next year. Cost of Sales currently equals
€90 Mio. and depreciation equals €18 Mio. Working Capital equals € 36 Mio.
and equipment equals €120 Mio.
Using this data, construct operating profit and invested capital for the current
year. You decide to build an - as is - valuation of Distress Co. To do this, you
forecast each ratio ( such as cost of sales to revenues) at its current level.
Based on this forecast method, what are the operating profits and invested
capital expected to be next year? What are two critical operating assumptions
(Identify one for profits, and one for capital) embedded in this forecast
method?
(10 Points)
8
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7) Using Multiples in Valuation
$ million
Company 1
Company 2
Company 3
Market data
Share price (dollars)
Shares outstanding (millions)
25
5
16
8
30
15
Short-term debt
Long-term debt
25
50
15
70
30
40
Operating profit
EBITDA
EBITA
25
22
30
23
59
51
a. The Data above present market and profit data for three companies. Using
this data compute enterprise value to EBITA for Companies 1 and 2.
Is the net difference between Company 1 and 2 the same for both ratios?
If not, why might this be?
(5 points)
b. The Data above present market and profit data for three companies. If
company 3 has non operating assets valued $50 Mio., what are the
company‘s appropriate enterprise value to EBITDA and enterprise value to
EBITA Multiples?
(5 points)
9
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7c) You are valuing multiple steady state companies in the same industry.
Company A is projected to earn 160 in EBITA, grow at 2% per year and generate
ROIC‘s equal to 15%. Company B is projected to earn 10%. What is the
enterprise value to EBITA multiples for both companies? Does higher growth lead
to a higher multiple in this case?
(5 points)
7d) You are valuing, multiple steady state companies in the same industry.
Company A is projected to earn $160 in EBITA, grow at 2 % per day and
generate ROICs equal to 15%. Company C is projected to earn € 120 in EBITA,
grow at 5 % per year, and generate ROICs equal to 12%. Both companies have
an operating tax rate of 25% and a cost of capital of 10%.
What are the enterprise-value-to EBITA multiples for both companies? Does
higher growth lead to a higher multiple in this case? Why do the results differ
between Questions 3 and 4?
(5 points)
10
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7e) Two companies have the same long-term prospects concerning growth and
ROIC. One of the companies temporarily stumbles during a new product launch,
and profits drop considerably as the company scrambles to fix the error. Will this
company trade at a higher or lower enterprise value multiple than its stable
peer? Why?
(5 points)
7f) Cherry AG is financed entirely by equity. The company generates operating
profit equal to €80million. Cherry AG currently trades at an equity value of €900
million. At a tax rate of 25%, what is the price-to-earnings multiple for Cherry
AG? New management decides to increase leverage through a share repurchase.
The company issues a €400 Mio. bond to repurchase €400 Mio. in equity. If the
bond pays interest at 5% and share price remains unchanged, what is the
company‘s new price to earnings ratio? How can you predict the direction the P/E
ratio will move without performing the calculation?
(5 points)
11
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III. Topic: Managing for Value
15 Points in total
1) Performance Management & M&A
1a) List and Explain the five main reasons a given firm might be the best owner
of a business
A:___________________________________________________________
B:___________________________________________________________
C:___________________________________________________________
D:___________________________________________________________
E:___________________________________________________________
(5 Points)
1b) Describe five acquisition archetypes that often create value for both the
acquirer and the seller. Based on situations with which you are familiar, rank
these archetypal strategies from easiest to hardest to plan and execute.
(5 points)
12
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2) Capital Structure
Explain why companies with the same credit rating can have very different
capital structures.
(5 Points)
13