FINC 6320 Final Exam

PLEASE NOTE

1. Neatly print your name on this cover sheet.
2. You may not speak with anyone other than the instructor about this test.
3. This exam is open book/open notes. You may draw on whatever material/documents/Excel that we used in class.
4. Make sure to go through the appendices in detail.
5. Use the provided space for your answers to the questions and please highlight your final answers in yellow.
6. Partial credit will be awarded for incorrect answers to the extent that conceptual understanding in your accompanying work calculations is evident to the instructor.
7. Answers that are correct but without an explanation of the analysis will receive no credit.
8. If you have questions about the exam, pls call the instructor directly on his cell at 917.837.6663.

Pledge: Before you turn the exam in, please write your name below indicating that you understand the following rules of the exam: “I have neither provided assistance to nor received assistance from anyone other than the instructor for this exam. I understand that violation of the exam rules will result in a grade of zero for the exam and disciplinary action.  I also will not share this exam with other students, current or future.”

 Signature (Type your name):                     __________________________________________

KEY ASSUMPTIONS

Below are key assumptions that you will need to answer some of the questions that are part of this final exam.

k_rf = 2.25%
ERP = 6.5%
Tax = 25%

 Question 1 (32 points total)

Lion Furniture Co. (“Lion”) is a leading provider of high-end furniture. You are part of the Finance team working on building a discounted cash flow analysis. Lion is publicly-traded on the NASDAQ stock exchange with a stock price of $42.25 and 28.3M total shares outstanding. Lion’s long-term (10-year) debt has an interest rate of 4.70%. The debt is not publicly-traded but has a credit rating of Ba1/BB+. Lion also has an 82% interest in a public company that has a stock price of $11.80 and total shares of 92.4M. Lion’s levered β_e is 1.8. The company has a target Debt/(Debt+Equity) of 50%. Other financial information is listed in Exhibits A & B of the Appendix.

1. What is Lion’s equity market value? (5 points)
2. What is Lion’s levered cost of equity (k_e)? (10 points)

Question 1 (Continued)

1. What is Lion’s weighted-average cost of capital (WACC)? (4 points)
2. Which number would be showing (show positive or negative sign as well) under the “Working Capital” row in a DCF for the year 2021? (4 points)
   

Question 1 (Continued)

1. What is Lion’s 2021Net Debt for Enterprise Value (EV) calculation purposes? (5 points)

Question 1 (Continued)

1. What are Lion’s 2021 Free Cash Flows (FCFs) for DCF calculation purposes? (4 points)

Question 2 (15 points total)

Metro is an NYSE-traded IT services company. Its main business is computer application development. The company currently has Net Debt of $11.7M and 24M total shares outstanding. Metro’s income statement is shown below ($ in millions). In addition, Exhibit C of the Appendix shows the comparable publicly traded company analysis for the industry.

1. Using the 2021 Sales multiples from the publicly-traded comparable company analysis, calculate Metro’s implied price per share. (6 points)

Question 2 (Continued)

1. Assuming Metro’s Net Income is expected to grow 20% from 2021-2022E and based on the relevant 2022E earnings ratio, what is Metro’s implied 2021 EBIT multiple? (5 points)

Question 2 (Continued)

60. The CFO has told you he likes to use the perpetual/Gordon Growth method for terminal valuation using a growth rate of 2% as well as a cost of capital of 10%. Assuming Metro’s 2021 FCF is $60.2M, what would that imply as the 2021 EBITDA trading multiple for the company? (4 points)

Question 3 (13 points total)

You have been tasked by the CFO of Austin Systems, a Fortune 500 telecommunications equipment company, which has a levered ß_e of 1.4 and D/E of 3.0 with a cost of debt of 6.00%. Its current annual FCF is $1,000M. You are evaluating the attractiveness of the acquisition of a target company called Texas Technology (Project Longhorn), which has a current annual FCF of $200M (which is expected to grow at 3% per year in perpetuity) and D/E of 1.75.

The acquisition of Texas Technology will cost a total of $4,000M. Austin Systems expects to finance the project with 75% (non-recourse) debt and 25% equity. The cost of debt (k_d) for the project is 5.10%. In addition, Texas Technology will generate annual pretax cost synergies of $50M (which stay flat in perpetuity) to the combination. Debt will not be paid down over time.

1. What is the NPV of Project Longhorn? (11 points)
2. What conclusion(s) do you draw from the analysis as a basis for your recommendation to the CFO? Note:  Assume your decision is based on this analysis alone and no other facts. (2 points)

Question 4 (22 points total)

Using the information in the table below for the leveraged buyout (LBO) of Dean, calculate the required solutions to questions A), B), C), & D). Note that the transaction occurs in year 0.

1. What is the amount of debt that was issued for the LBO transaction? (4 points)

Question 4 (Continued)

1. What is the amount of debt outstanding at the end of year 2 (before sale)? (8 points)

Question 4 (Continued)

1. What is the IRR to the private equity investors? (3 points)
2. What multiple of year 3 revenues would the private equity firm need to sell the company at in year 2 in order to achieve an IRR of 35%? (7 points)

Question 5 (20 points total)

1. What are three reasons companies do top-down projections instead of bottoms-up? (2 points)
2. What is not an issue when comparing the NPV of 2 different projects (Note: stick to corporate finance theory)? (2 points)
3. Which improves valuation the most (rank from high to low and explain why for each), a $10M increase in revenues, $10M decrease in costs or $10 decrease in change in net working capital? (2 points)
4. A company has positive EBITDA but is filing for bankruptcy. Provide 3 possible reasons. (2 points)
5. What are three ways the most cash-efficient companies are able to minimize working capital costs? (2 points)
6. What are the benefits and issues of using LTM EBITDA multiples vs. forward (or projected) P/E ratios? (2 points)

Question 5 (Continued)

1. What are 4 ways (not from revenues or expenses) a company can raise cash? (2 points)
2. Give 3 reasons which could explain a big discrepancy between a DCF analysis and a comps analysis? (2 points)
3. What happens to the NPVs (i.e., positive or negative) in both DCF and LBO models when the IRR for each is between the cost of equity and the WACC? (2 points)
4. Provide 3 reasons why private equity firms prefer to sell their portfolio companies rather than take them public through an IPO? (2 points)

1. Between working at an A-round or B-round start-up, which one is more attractive and why? (2 points)

1. What does Payback analysis capture that NPVs or IRRs don’t? (2 points)