[10%]

Problem 1

Company ABC bond with a face value of \$100,000, maturity in 5 years and an annual coupon of 6% (which just has been paid) is now traded at \$90,000. Calculate bond’s yield-to-maturity (which reflects current cost of debt). Hint: use IRR function in Excel.

Problem 2

An intern business analyst estimates the cost of equity of a company. He estimates the risk-free interest rate at 3% and the average stock market return at 9%. As the company is not listed, he does not know its beta, and therefore uses the industry average value =2. What would be the analyst’s estimate of the cost of equity of the company? [5%]

The analyst’s supervisor points out, that the industry average debt-to-equity ratio is 4-to-1,while for the company at consideration it is 1-to-4, and asks him to update the estimation taking that into account. What would be his new estimation of the cost of equity? [5%]

Problem 3

Suppose that you are valuing Romashka Ltd, which is a florist business operating in Kazakhstan. In this year the Revenue of Romashka Ltd is \$2.8m, Costs of Goods Sold is \$1.2m, Operating Expenses are \$300k, Depreciation and Amortization – \$200k. Romashka Ltd has \$5m of outstanding debt, with the face value being the same as the market value.
The interest rate is 8%. Kazakhstan profit tax rate is 10%. Capital investments in the current year were \$350k, and the working capital has increased by \$120k.

Question 1. Calculate this year Net Income, NOPLAT and enterprise Free Cash Flow.[10%]

Question 2. Suppose that the U.S. T-bonds rate is 1.5%. Equity market premium is 5.5%.
Using a small sample of listed flower and gift companies you estimate their beta at 1.25.
Kazakhstan government bonds are currently traded at yield 5.5%. The Valuation Handbook suggests that you should use the size premium of 8% for this size of business.
Given this information, and assuming that Romashka Ltd will maintain 40%/60% debt-to-equity ratio, which is typical for the industry, what would be your estimation of Romashka’s WACC?[10%] EasyDue™ 支持PayPal, AliPay, WechatPay, Taobao等各种付款方式!

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