FIN - Valuation and Capital Investment problems

Please answer each of the following questions on an Excel spreadsheet. Each question should be on a separate tab and be sure to document all your work and calculations.
Clearly identify the final answers by highlighting those cells in yellow.
1. The Gersin Gear Company is considering going public and is trying to determine its value based on its future dividend payments. Their current EPS is $7.75, and over the next 5 years they anticipate a payout ratio of 10% and ROE of 20%. During this high-growth period, their beta is estimated at 1.25, with a risk-free rate of 2.5% and a marker risk premium of 6%. At the end of the 5-year high growth period, they estimate their stable beta will be 1.00, with ROE of 12% and growth of 3%. (Risk-free rate andmarket risk premium will remain the same.) Using this information, determine the per-share value for the company.
2. The Gossman Guitar Company is trying to determine the current value its equity. As of its last
financialstatements, it had net income of $2,500, with after-tax cash earnings of $120. The book value of its equity was $10,500 with cash value of $3,500. The CAPEX was $2,500,
depreciation was $1,250, change in working capital was $500, and the cash flow from net debt
was $750. You may assume a risk-free rate of 3%, a beta of 1.4 and a risk premium of 5%. After
a 5-year high growth period, the stable growth will be 2%, but the cost of equity will remain the
same. Given this information, what is the equity value of the operating cash flows?
3. The Kentucky Headhunter Bourbon Company has an operating income (EBIT) of $250 with a
marginal tax rate of 30%. The net CAPEX was $50 with a $25 change in working capital. Over
the next 5 years, they anticipate an average reinvestment rate of 35% with a return on capital of
22%. During this high-growth period, they estimate a beta of 0.85, a risk-free rate of 3% and risk
premium of 4%. Pre-tax debt cost is 5.5%, with a 20% debt ratio. After year 5, the estimated
beta will be 1.00, with the same risk-free rate andmarket risk premium as in the high-growth
period. The stable pre-tax debt cost will be 4.0%, the tax rate will remain at 30% and the stable
growth rate will be 3%. The schedule for Net CAPEX over the 5-year high-growth period is: $55,
$60, $65, $50, $40. The schedule for Change in Net Working Capital will be: $30, $35, $40,
$30, $20. For the stable period, the FCFF can be estimated using the after-tax EBIT less
projected reinvestment. Based on this information, what is the projected enterprise value for the
company?
4. The Garcia Photography Studios is trying to estimate their equity multiples based on the
following information: High-growth period = 4 years, net income of $45 on sales of $350, with
book value of equity of $125. During the high-growth period, the payout ratio will be 10%, and
the firm’s beta of 1.10, risk-free rate of 3% andmarket risk premium of 5% will remain constant.
After the 4-year high-growth period, the growth rate in earnings will drop to 4%.
a) Using this information, determine the company’s P/E, PEG, Price to Book Value and Price to
Sales ratios.
b) What would be the P/E ratio if the high-growth period ended up being 5 years and the stable
growth rate was 5%?

5. The Thibodeaux Crawfish Company wants to determine its value multiple. They are
estimating a 3 year high-growth period with a starting sales level of $1,250, EBIT of $500,
depreciation of $75, tax rate of 35%, and capitalinvested of $700. During the high-growth
period, the firm will have a reinvestment rate of 65% and a cost of capital of 9.0%. After the
high-growth period, the growth rate will be 3%.
a) Using this information, determine the enterprise value for the company, as well as
EV/EBITDA, EV/Cap investment and EV/Sales.
b) What would the impact to the valuations if the tax rate were 40% and the reinvestment rate
during the high-growth period was 70%?