Quiz 3 Standard Solution

Name:______________________________________ Id.
No:____________________
Birla Institute of Technology and Science, Pilani

First Semester: 2023-2024
Announced Quiz 3
Course Name & No.: Business Analysis and Valuation ECON F355
Maximum Marks: (45 Marks) 15% Weight-age Date: 24th Nov 23
Duration: 30 Minutes Type: Closed Book
Instructions for the students

1. Write your name and BITS ID No in the space provided at the top of this page
2. This paper consists of 15 multiple-choice questions (choose the most appropriate answer; 2 marks each) and Fifteen True and
False (1 mark each). There is no negative marking.
4. Write your answers in the table provided below. Answers written elsewhere or in incorrect order will not be evaluated.
Overwritten/ambiguous answers will not be evaluated.
5. Unreasonable assumptions will be penalized.
6. In all the analytical questions mark the closest value.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
16 17 18 19 20 21 22 23 24 25
Given the below information, answer the question that follows:
I. Proust Company has FCFF of $1.7 billion and FCFE of $1.3 billion. Proust’s WACC
is 11 percent, and its required rate of return for equity is 13 percent. FCFF is expected
to grow forever at 7 percent, and FCFE is expected to grow forever at 7.5 percent.
Proust has debt outstanding of $15billion.
1. What is the total value of Proust’s equity using the FCFF valuation approach?
(a) 30.475 (b) 32.547 (c) 35.556 (d) 20.475
2. What is the total value of Proust’s equity using the FCFE valuation approach?
(a) 20.409 (b) 25.409 (c) 26.203 (d) 21.601
II. Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation
approaches. Pham has collected the following information (currency in euros)
 Phaneuf has net income of €250 million, depreciation of € 90 million, capital
expenditures of € 170 million, and an increase in working capital of € 40
million.
 Phaneuf will finance 40 percent of the increase in net fixed assets (Capital
expenditures less depreciation) and 40 percent of the increase in working capital
with debt financing.
 Interest expenses are € 150 million. The current market value of Phaneuf’s
outstanding debt is € 1,800 million.
 FCFF is expected to grow at 6.0 percent indefinitely, and FCFE is expected to
grow at 7.0 percent.
 The tax rate is 30 percent
 Phaneuf is financed with 40 percent debt and 60 percent equity. The before tax
cost of debt is 9 percent, and the before-tax cost of equity is 13 percent.
 Phaneuf has 10 million outstanding shares.
3. Using the FCFF valuation approach, what is the total value of the firm?
(a) 7665.20 (b)5667.21(c)5766.20 (d) 6675.23
4. Using the FCFF valuation approach, what is the total market value equity?
(a) 3966.20 (b) 9663.20 (c) 6693.20 (d) 6969.20
5. Using the FCFF valuation approach, what is per share value of equity?
(a) 963.26 (b) 639.32 (c) 396.62 (d) 669.26
6. Using the FCFE valuation approach, estimate the total market value of equity
(a) 3174.33 (b) 4713.33 (c) 7413.33 (d) 3147.33
7. Using the FCFE valuation approach, estimate the per share value of equity
(a) 713.43 (b) 317.43 (c) 731.34 (d) 373.43
III. Jorge Zaldys, analysts, is researching the relative valuation of two companies in the
aerospace/defense industry, NCI Heavy Industries (NCI) and relay Group International
(RGI). He has gathered relevant information on the companies in the following table.
EBITDA Comparisons (in € Millions except Per-Share and Share-Count Data)
Company RGI NCI

Price per share 150 100
Shares Outstanding 5 Million 2 Million
Market value of debt 50 100
Book value of debt 52 112
Cash and investments 5 2
Net Income 49.5 12
Net Income from continuing 49.5 8
operations
Interest Expense 3 5
Depreciation and 8 4
Amortization
Taxes 2 3
8. Calculate P/EBITDA for NCI

(a) 14 (b) 10 (c) 12 (d) 11
9. Calculate P/EBITDA for RGI
(a) 12 (b) 10 (c) 15 (d) 8
10. Calculate EV/EBITDA for RGI
(a) 10.72 (b) 12.72 (c) 11.36 (d)14.42
11. Calculate EV/EBITDA for NCI
(a) 14.9 (b) 12.2 (c) 16.5 (d)22.5
12. Which of the following is equity valuation multiple?

(a) Price-book value ratio. (b) Price-sales ratio (c) Price-earning ratio (d) All the above (e)
None of the above
13. Discounted cash flow approach to valuing a firm does not involve
(a) Analysing historical performance (b) Forecasting performance (c) Estimating the cost of
capital (d) Both (a) and (c) (e) None of the above
14. The forecast driver used for interest expenses of a company in DCF valuation is usually
(a) Current marginal interest rate (b) Average interest expenses for the past five years (c)
Prior year’s total debt (d) Prior year’s total debt adjusted for repayments due within the
next twelve months (e) None of the above
15. It may be difficult to apply the DCF model of valuation to a firm which
(a) Has substantial unutilized assets (b) Has significant patents and product options (c) Is a
private firm (d) All of the above (e) None of the above
True or False
16. The explicit forecast period in the enterprise DCF model is typically less than ten years.
(True)
17. In the DCF valuation process, non-operating loss is excluded while calculating EBIT (False)
18. Cash flow from settlement of disputes is a non-operating cash flow (True)
19. In enterprise DCF valuation, ROIC is a better measure than Return on equity as it reflects
operating performance as well as financial structure of the firm (True)
20. The ability of a company to replace its worn out equipment is high when its EBIDTA to
interest ratio is high (True)
21. The free cash flow to equity model may be viewed as an extension of the dividend discount
model (True)
22. Dividends are the only cash flows received by the shareholders of a company (True)
23. A demerit of relative valuation is that there is no conceptual foundation for most of its
metrics. (False)
24. Price-sales ratio is not an enterprise valuation multiple. (True)
25. The companion variable for P/B multiple is the EPS. (False)
26. It is advisable to use EV/FCFF multiple to value a firm whose capital expenditures are
predictable and growth stable. (True)
27. Empirical evidence suggests that forward-looking multiples of cash flows are not better
predictors of value than the historical ones, as the former have considerable elements of
subjectivity (False)
28. . Relative valuation approach is likely to be more affected by market valuation errors than the
DCF approach. (True)
29. Free cash flow to firm tends to be more volatile than EBIDTA. (False)
30. EV/BV multiple does not focus on the value of equity (False)

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Name:______________________________________ Id.

Birla Institute of Technology and Science, Pilani

Instructions for the students

Given the below information, answer the question that follows:

EBITDA Comparisons (in € Millions except Per-Share and Share-Count Data)

Company RGI NCI

8. Calculate P/EBITDA for NCI

12. Which of the following is equity valuation multiple?

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