BBMF3023 CORPORATE TREASURY MANAGEMENT

TUTORIAL 4
1.

MOBILE ONE Limited, a telecommunications service provider listed on the Singapore Exchange, has just
announced its latest quarterly financial results. Despite the substantial deteriorating net profit after tax
figure, the price quoted has remained unchanged at S$3.00. Subsequent to the announcement, the analysts
fraternity (i.e. the analyst community) has provided prospective price guidance (i.e. future price guidance)
on the said companys stock, with some recommending an UNDERPERFORM (i.e. likely to be
underperforming the market performance), some NEURTAL/MARKET PERFORM (i.e. performance
likely to be in line with the market performance), while some have recommended OVERPERFORM (i.e.
likely to be performing better than the market).
You are the Head of Corporate Treasury of a local (Malaysia) public listed holding company with very
substantial cash and cash equivalent surplus to (i.e. more than) the investment needs of the holding
company. Your Chairman is interested in utilizing these free cash flows to invest in MOBILE ONE, but he
is very perplexed (i.e. confused) over the differing valuations provided by the analysts fraternity.
Required:
As the Corporate Treasury Head, the Chairman has approached you for some advice on the reasons for the
different prospective valuations for MOBILE ONE. Your answer should include an explanation of the
various methods used for valuing firms.
[Total: 20 marks]

2.

Robbie corp which is unlisted has a pre-tax profit of RM 80 million. It has issued 100 million shares.
Corporation tax rate is 28%. The related industries current PE ratio is the multiple of 15 times. Value
Robbie Corp shares.

3.

How do you define free cash flow? What is the free cash flow of the following firm?

Operating Profit (after depreciation of RM 2 mil)

Interest paid
Tax Rate
Investment Expenditure

RM 25 million
RM 1 million
28%
RM 3 million

4.

Latitude Tree holdings bhd earns 16 cents per share. It has a policy of retaining 75% of its profits to invest
at an average return of 18%. Its shareholders require a return of 15%. Whats the ex-dividend value per
share of Latitude Tree Holdings Bhd? What would be the impact on the share price i.e. the new share price
if investors require a return of 20%?

5.

What are the respective values of the geared and ungeared firms with the following data:

Earnings
Corporate Tax Rate
Cost of capital for the ungeared company Keu
The geared firm borrows RM 200 million?

RM 100 Mil
28%
15%