1

Adjusted EBIT = 1500- 100 = 1400

Adjusted EBIT (1-t) = 840
- Reinvestment = 336
FCFF 504 Tax rate = 480/1200 = 40%

Total Beta = 0.80/0.5 = 1.6

Levered beta = 1.6 (1 + (1-.4)(3/7)) = 2.011428571
Cost of Equity = 6% + 2.01 (4%) = 14.04% Use total beta
Cost of Capital = 14.04% (.7) + 7% (1-.4)(.3) = 11.09%

Value of private firm = 504 (1.05)/(.1109-.05) = 8692.51

2.

Market value of equity

= 1800
Net Income next year
= 1500

MV of Equity/ Forward Earnings = 1.2 1800/1500

Cost of equity = 10%; Growth
PE =1.2 = Payout Ratio / (.10 - .04) rate = 4%

Payout ratio = 7.20%

Return on equity = g/ (1- Payout ratio) = 4.31%

3.

Riskfree Rate = 4.00%

Beta = 0.9
Mature market ERP = 5%
Lamnda for Mexico = 0.5 Prop of Infosys's revenues/ Avg co revenues
CRP for Mexico = 3.60% Default spread * Rel Equity Mkt Volatility
Cost of Equity = 10.30% 4 + (0.9 * 5) + (0.5 * 3.6)
4.

Loan Type Face Interest Interest

Value Rate Expenses
Secured bank loan 200 7.00% 14
Subordinated bank loan 150 8.00% 12
Unsecured short term bank 150 6.00%
loan 9
Total Interest Expense 35
Interest coverage ratio = 4 140/35
Rating = A- See table
Cost of debt = 8.00% 5% + 3%
After-tax cost of debt = 4.80% 8% (1-.4)

5.

Step 1: Average EPS

Year EPS
2002 0.69
2003 0.71
2004 0.90
2005 1.00
2006 0.76
2007 0.68
2008 0.09
2009 0.16
2010 -0.07
2011 -0.15
Average Earnings Per Share 0.48

Normalised EPS in 2012 0.51

Step 2: Estimating Normalised FCFE IN 2012

Normalised EPS in 1994 0.51
( assume capital expenditure and
Less (Capex - Depreciation) (1-debt ratio) 0.25 depreciation will grow at 6%)
Less Change in Working Capital(1-debt ratio) 0.06
Normalised FCFE in 1994 0.19

Step 3: Cost of Equity

Ke = 7% + 1.20(5.0%) = 13

Value per share of equity = 0.19/(0.13-0.06) = 2.73