ITEMS 41 To 46

ITEMS 41 TO 46
41. Assume that today is December 31, 2019, and that the following information applies to
Vienna Airlines :
 After-tax operating income [EBIT x (1-tax rate)] for 2020 is expected to be P500 million.
 The depreciation expense for 2020 is expected to be P100 million.
 The capital expenditures for 2020 are expected to be P200 million.
 No change is expected in net operating working capital.
 The free cash flow is expected to grow at a constant rate of 6% per year.
 The required rate of return on equity is 14%.
 The WACC is 10%.
 The market value of the company’s debt is P3 billion.
 200 million shares of stock are outstanding.
Using the corporate valuation model approach, what should be the company’s stock price today?
FCF1
Capital
= EBIT(1 – T) + Depreciation – expenditures –
( Net operating
working capital )
= P500,000,000 + P100,000,000 – P200,000,000 – $0

= P400,000,000.
FCF 1
Firm value = WACC −g FCF
$ 400 ,000 , 000
= 0 . 10−0. 06
$ 400 ,000 , 000

= 0 .04
= P10,000,000,000.
This is the total firm value. Now find the market value of its equity.
MVTotal = MVEquity + MVDebt

P10,000,000,000 = MVEquity + P3,000,000,000
MVEquity = P7,000,000,000.
This is the market value of all the equity. Divide by the number of shares to find the price
per share. P7,000,000,000/200,000,000 = P35.00.
42. Belgrade Company invests a large sum of money in R&D; as a result, it retains and reinvests
all of its earnings. In other words, the company does not pay any dividends and it has no plans to
pay dividends in the near future. A major pension fund is interested in purchasing Belgrade’s
stock. The pension fund manager has estimated Belgrade’s free cash flows for the next four years
as follows : P3 million, P6 million, P10 million, and P15 million. After the 4th year, free cash flow
is projected to grow at a constant rate of 7%. Belgrade’s WACC is 12%. The market value of its
debt and preferred stock totals PP60 million, and it has 10 million shares of common stock
outstanding.
What is the present value of the free cash flows projected during the next 4 years?
3,000,000 x 0.893 = 2,679,000

6,000,000 x 0.797 = 4,782,000
10,000,000 x 0.712 = 7,120,000
15,000,000 x 0.636 = 9,540,000
24,121,000
43. Refer to no.42. The firm’s horizontal value was computed at P321 million : 15,000,000 x
107% divided by (12% WACC minus 7% constant growth rate). Using financial calculator, the
total firm value was determined to be P228,113,612. What is the estimate of Belgrade’s price per
share? 16.81
The firm’s horizon value is calculated as follows:

$ 15 , 000 , 000 (1 . 07)
=$ 321 , 000 ,000 .
0 .12−0 . 07 GIVEN
The firm’s total value is calculated as follows:

0 1 2 3 4 5
WACC = 12%
| | | | | gn = 7%
|
3,000,000 6,000,000 10,000,000 15,000,000 16,050,000
16 , 050 , 000
PV = ? 321,000,000 = 0 .12−0.07
Using your financial calculator, enter the following inputs: CF0 = 0; CF1 = 3000000; CF2 =
6000000; CF3 = 10000000; CF4 = 15000000 + 321000000 = 336000000; I/YR = 12; and then
solve for NPV = P228,113,612. GIVEN
To find Barrett’s stock price, you need to first find the value of its equity. The value of
Barrett’s equity is equal to the value of the total firm less the market value of its debt and
preferred stock.
Total firm value P228,113,612
Market value, debt + preferred 60,000,000 (given in problem)
Market value of equity P168,113,612
Barrett’s price per share is calculated as:

$168 ,113,612
=$16 .81 .
10 ,000 ,000
44. Finland Company’s current stock price is P36; its last dividend was P2.40, and its required rate
of return is 12%. If dividends are expected to grow at a constant rate in the future, and if the
required rate of return is expected to remain at 12%, what is Finland’s expected stock price 5 years
from now? 45.94 or 45.95
36 = 2.40 (1 + g)
0.12 – g
4.32 – 36 g = 2.40 + 2.40 g

g = 0.05 or 5%
36 x (105%) raised to 5 = 45.95
45. Saskatchewan Company is experiencing rapid growth. Earnings and dividends are expected to
grow at a rate of 15% during the next two years, at 13% the following year, and at a constant rate
of 6% during year 4 and thereafter. Its last dividend was P1.15, and its required rate of return is
12%. What is the value of the stock today?
The above problem, about dividends paid during the supernormal growth, was erroneously
uploaded as number 45 in the Google form quiz. We did not, and will no longer tackle nonconstant
supernormal growth.
Item number 45 should have been this problem
Your broker offers to sell you some shares of Barbados Company common stock that paid a
dividend of P2.00 yesterday. Barbados’ dividend is expected to grow at 5% for the next 3 years. If
you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is
12%. What is the dividend per share at the end of 3 years? 2.32  this was the answer reflected
in the Google form quiz.
2.00 x (105%) raised to 3 = 2.32
46. Maldives Company’s sales in 2019 is P4,615.5. Its operating costs amounted to P3,923.2 while
depreciation is P185.1. Property, plant and equipment net at the end of 2019 and 2018 amount to
P1,469.3 and P1,360.5, respectively. Net operating working capital at the end of 2019 and 2018
were P1,175.5 and P1,088.4, respectively. Capex in 2019 is the increase in PPE net in 2019 vs
2018, plus Depreciation in 2019.
What is the free cash flows in 2019? 108.42
Sales 4,615.5
-Operating costs 3,923.2
-Depreciation 185.1
EBIT 507.2
X 60 % 304.32
+ Depreciation 185.1
489.42
- CAPEX 293.9 (1,469.3 – 1,360.5) + 185.1
- Change in NOWC 87.1 (1,175.5 – 1,088.4)
Free cash flows 108.42

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= P500,000,000 + P100,000,000 – P200,000,000 – $0

$ 400 ,000 , 000

MVTotal = MVEquity + MVDebt

3,000,000 x 0.893 = 2,679,000

The firm’s horizon value is calculated as follows:

The firm’s total value is calculated as follows:

3,000,000 6,000,000 10,000,000 15,000,000 16,050,000

Total firm value P228,113,612

Market value, debt + preferred 60,000,000 (given in problem)

Market value of equity P168,113,612

Barrett’s price per share is calculated as:

4.32 – 36 g = 2.40 + 2.40 g

36 x (105%) raised to 5 = 45.95

2.00 x (105%) raised to 3 = 2.32

What is the free cash flows in 2019? 108.42

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