Please solve question 1 and 2 Please solve question 1 and 2 FIN 440 In Class Que

Question

Please solve question 1 and 2 Please solve question 1 and 2
FIN 440 In Class Questions 7/3 1.) Use the below information to calculate the intrinsic value using the simple FCF model Chevron (CVX) has estimated 2019 Sales of S 176 billion with a 4% operating margin. You expect sales to grow by 4% into the future. It is in the 35% tax bracket. You estimate Capital Expenditures(CAPEX) next year of $15 billion and a depreciation expense of $19 billion. CVX has $4.8 billion in cash on hand. It's book value of total liabilities is $39.7 billion. You expect no change in networking capital. You calculate the WACC for ax as 7.7% and the company has 1.911 billion shares outstanding. 2.) The market price for SPC Inc is $82.00. SPC recently paid a dividend of $3.25 per share. You expect the dividend to increase by 12% per year for the next 3 years and then to grow at 4% per year for the foreseeable future. The yield on the 10 year treasury is 2.90%. You have estimated SPC's beta to be 1.3. The market Risk premium is 5%. A.) Using CAPM estimate the equity cost of capital for SPC B.) Calculate the estimated intrinsic value of SPC C.) Is SPC overvalued or undervalued based on your estimates.

Explanation / Answer

1. Free Cash Flow= estimated Sales* opreating prfit margin* (1-tax rate)+ Depriciation-change in Capex- Change in Working Capital.

=$176*0.04*(1-0.35)+19-15-0

=$8.576 Billion

Now discounting it to the Present Value

=$8.576 Billion/(WACC-Growth Rate)

=$8.576/(0.077-0.04)= $231.7838 Bllion

Outsanding no.of shares -1.911 Billion

Thus Intrinsic value of the share = $231.7838 Billion/ 1.911 Billion= $121.2893 per share

2. A) Cost of equity using CAPM

= Risk free rate+beta* risk premium (Note- Treasury Yeild is always Risk free)

=2.9 +1.3*5=9.4%

B) Estimated Intrinsic Value= Present value of estimated Dividend

Expected Dividend in Year 1- $3.25*1.12=$3.64

Expected Dividend in Year 2- $3.64*1.12=$4.08

Expected Dividend in Year 3- $4.08*1.12=$4.57

Intrinsic Value= $3.64/(1.094)+ $4.08/(1.094^2)+ $4.57/(1.094^3)+ (($4.57*(1.04))/(0.94-0.04))/(1.094^3)

=$3.33+$3.41+$3.41+$3.49+$67.16= $77.38

C) SPC is overvalued as the current Market Price is $82 while Intrinsic Value is $77.38

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