Student

Name:
Student Number:

Score:

Faculty of Economics and Business Administration

Exam:

Corporate Valuation for Finance

Code:

E_FIN_CVF

Examinator:
Dr. Matteo Millone

Date:

March 16, 2016

Time:

15:15 18:00

Duration:

2 hours and 45 minutes

Calculator allowed:
Yes

Graphical calculator
allowed:

Yes

Number of questions: 10

Type of questions:
Open

Answer in:

English

Credit score:
60 points in total. A score of 60 is equal to an exam grade of 10 worth 60% of
final grade.

Grades:

The grades will be made public on: Wednesday, March 30th at the latest.

Inspection:

Thursday, March 31st room and time TBA.

Number of pages:
16 (including front page)

Good luck!

Exam Corporate Valuation for Finance

Question 1
Assume that two firms have exactly the same revenues and earnings growth. Will their value be
the same? Why? You can use a numeric example (3 points)

Lecture 1 slides from 24 to 27

Student Name: Student Number:

Question 2
a. Some firms have higher ROIC than others. This is usually a combination of three
factors. What are these three factors? Briefly explain. (3 points)
b. Growth comes in three main varieties. What are these three types of growth? Briefly
explain and discuss their relative importance and sustainability. (3 points)


Lecta. Lecture 1 slide 37
b. Lecture 1 slide 46

Question 3
a. If we expect a firm to change significantly its capital structure which framework for
valuation should we use? Explain and show the components of the valuation
framework. (3 points)
b. How should the different components of the previous valuation framework be
discounted? Explain in detail. (3 points)


a.

a. Lecture 2 slide 26
b. Lecture 2 slide 30

Question 4
Look at the financial statements for the Bluth Company in the appendix:
a. Compute NOPLAT, average invested capital and ROIC for the current and future year.
Assume an operating tax rate of 25% (6 points)
b. If the weighted cost of capital is 12 % is the company creating value? In which year is the
firm performing better? Why? (3 points)

Student Name: Student Number:

Question 5
Look at the figure below:
a. What are the key assumptions behind both diverging bold lines? (3 points)

Student Name: Student Number:

b. What are the continuing value formulas that lead to the two curves? (3 points)

Lecture 4 slide

Question 6
You are trying to estimate the WACC for a private firm:
a. How would you calculate the cost of debt if the firm has a credit rating and what if it
does not? (3 points)


Lecture 6 slide 24

Question 7
a. What is a forward-looking multiple? Why should you use a forward-looking multiple
instead of a backward-looking multiple when valuing a company? (3 points)
7

b. Show the relationship between value-to-EBITA multiple and the key value driver
formula. (3 points)

a. Lecture 5 slides 46 and 47

b. Lecture 5 slides 48 and 49

Questions 8
Satriales Pork Store, has been open for 30 years and its business is steady. However due to
some health and safety concerns it might lose some of its business. The future of the store will
depend on an inspection by the authorities:
a. If the inspectors find no reasons to be concerned expected growth is 8% and ROIC is
15%; otherwise growth will drop to 3% and ROIC to 7%. This years NOPLAT is $ 5
millions, next years NOPLAT is $ 5.5 millions and the WACC is 8%. What is the enterprise
value in each scenario? If the scenarios are equally likely, what is the enterprise value for
the company. (3 points)
b. Given that the probability of the two scenarios is the same, could you instead just take
the weighted average the inputs? Why? (3 points)

Student Name: Student Number:

a. If the growth is equal to the WACC the value of the firm goes to infinite and the exercise
cannot be solved. If you set up the calculation right you will get the full score.
b. Since valuation is not a linear function, you cannot average the inputs to
determine the expected value.

Question 9
The following are the projected cash flows for Sirius Cybernetics Corp., over the next five years:

Year

1
2
3
4

$250.00
$262.50
$275.63
$289.41

Interest*
(1-t)
$90.00
$94.50
$99.23
$104.19

2
$340.00
$357.00
$374.85
$393.59

5
$303.88 $109.40 $413.27
Terminal
$3,946.50
$6,000.00
Value


The firm has a cost of equity of 12% and a cost of capital of 9.94%. Answer the following
questions:
a. Which column (1 or 2) represents cash flows to the firm and which column represents
cash flows to equity? Briefly explain (3 points)
b. What is the value of equity of this firm and what is the value of the firm? (3 points)

PV of CF to Equity = 250/1.12 + 262.50/1.12^2 + 275.63/1.12^3 + 289.41/1.12^4 +

(303.88+3946.50)/1.12^5 = $3224
PV of CF to Firm = 340/1.0994 + 357/1.0994^2 + 374.85/1.0994^3 + 393.59/1.0994^4
+ (413.27+6000)/1.0994^5 = $5149
























10

Student Name: Student Number:

Question 10
a. Explain the difference between shareholder value and stakeholder value. How do these
two theories view Corporate Social Responsibility (CSR)? (3 points)
b. How is the idea of creating shared value different from CSR? and how does it fit in the
debate between shareholder an stakeholder value? (3 points)
c. In the article by Krger Corporate goodness and shareholder wealth, the author
provides an explanation of the asymmetric effect of corporate sustainability. Briefly
explain what this reason is and what it has to do with corporate governance. (3 points)

11

12

a. Lecture 7 slides 3 to 8
b. Lecture 7 slide 12
c. Lecture 7 slides 40 to 43

Student Name: Student Number:

Formula sheet

Relationship between levered (ke) and unlevered (ku) cost of equity:

!
!

= + ! ( ) !"#
( )
!

Present value of future free cash flow:
=

(1 + )^

Perpetuity of free cash flow:

Perpetuity of free cash flow with growth:

=

!!!

Key value driver formula:

1
=

13

Appendix

14

Student Name: Student Number:

15