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. [5%]
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%]
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.
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%]
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