Shaar (from the previous problem) has revised slightly her estimated earnings growth rat...

Shaar (from the previous problem) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying trend) EPS, which is adjusted for temporary impacts on earnings, now wants to compare the current value of Rio National’s equity to that of the industry, on a growth-adjusted basis. Selected information about Rio National and the industry is given in Table 13.10.

Compared to the industry, is Rio National’s equity overvalued or undervalued on a P/E to- growth (PEG) basis, using normalized (underlying) earnings per share. Assume that the risk of Rio National is similar to the risk of the industry.

Previous problem. While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either free cash flow to the firm (FCFF) or free cash flow to equity (FCFE) in her valuation process.

a. State two adjustments that Shaar should make to FCFF to obtain free cash flow to equity.

b. Shaar decides to calculate Rio National’s FCFE for the year 2009, starting with net income. Determine for each of the five supplemental notes given in Table 13.7 whether an adjustment should be made to net income to calculate Rio National’s free cash flow to equity for the year 2009, and the dollar amount of any adjustment.

c. Calculate Rio National’s free cash flow to equity for the year 2009.

Previous problem. Rio National Corp. is a U.S.-based company and the largest competitor in its industry. Tables 13.5–13.8 present financial statements and related information for the company. Table 13.9 presents relevant industry and market data.

The portfolio manager of a large mutual fund comments to one of the fund’s analysts, Katrina Shaar: “We have been considering the purchase of Rio National Corp. equity shares, so I would like you to analyze the value of the company. To begin, based on

Rio National’s past performance, you can assume that the company will grow at the same rate as the industry.”

a. Calculate the value of a share of Rio National equity on December 31, 2009, using the constant growth model and the capital asset pricing model.

b. Calculate the sustainable growth rate of Rio National on December 31, 2009. Use 2009 beginning-of-year balance sheet values.