Question

Question 1 A given company has the following projected FCF'S: End of Year FCF (Millions SEK) Suppose that the weighted average cost of capital is equal to 5% and that the free cash-flows will grow at a rate equal to 1.5% beyond year 4 Suppose further that its debt is equal to 100 Million SEK and the number of shares is 30 million. What is the share price? (Round your answer to two decimal digits) Question 2 Suppose that in one year only three possible outcomes can take place. In each one of those possible scenarios the return of the stock of the companies Spin and Bang will take the following values with the indicated probabilities: Probabilities Spin ang 9.15 0.1 0.09 -0.03 Suppose that you would like to invest in a portfolio of the two and your investment wealth is equal to 100.000 SEK You would like to allocate 35,000 SEK to Spin and the rest will be invested in Bang. What will be the expected return of your portfolio? (Answers rounded to two decimal digits).

hello what is the answer to both??

Answer 1

Answer to the question 1 as below:

Below the given values:

in millions	Amount
CF1	15
CF2	27
CF3	25
CF4	14

Debt	300
No. Shares	30

Growth

1.50%

Weighted Average cost of capital

5%

We need to find Value of the firm using the discounting model:

in millions	Amount	Calc. Present Value	Present Value
CF1	15	(15)/(1+0.05)^1	14.28571
CF2	27	(27)/(1+0.05)^2	24.4898
CF3	25	(25)/(1+0.05)^3	21.59594
CF4	14	(14)/(1+0.05)^4	11.51783
CF5…to infinity (14*1.015)	14.21	14.21/(0.05-0.015) = 406 is Value as on year 5 of the future cash flows Discounting 406 to PV = 406/(1+0.05)^5	318.1116

CF1 - CF4 are discounted using the present value formula = CF/ (1+Weighted Average cost of capital)^n

n= year of the cash flow

CF5 is arrived by applying the growth rate of 1.5%. We then calculated the price as on year 5 and discounted to get its PV.

Adding the above Present Value gives the Value of the firm =390 millions

Value of Firm = Value of Equity + Value of Debt

477.89 = Value of Equity +300

Value of Equity = 90

Price of Equity = Value of Equity/No. of Shares

= 90/30

=SEK 3