Question 1- Stock Valuation Analysis
Caliente Argentinian Grill (CAG) has 31m shares outstanding, $3.8m in debt and $307m in cash. It projects free cash flows for next 4 years based on earnings forecasts below, a marginal tax rate of 38%, capital expenditures increasing from $140m in Year 1 to $155m by Year 4 in $5m increments, and increases in net working capital (NWC) based on a NWC-to-Sales ratio of 5% per year.
|
Sales
|
$1,816
|
$2,138
|
$2,482
|
$2,848
|
$3,234
|
|
Growth vs Prior Year
|
|
17.7%
|
16.1%
|
14.7%
|
13.5%
|
|
Cost of Goods Sold
|
|
($1,336)
|
($1,539)
|
(S1,766)
|
(S2,005)
|
|
Gross Profit
|
|
5802
|
5943
|
$1,082
|
$1,229
|
|
Other Operating Expenses
|
|
($201)
|
($222)
|
($243)
|
($265)
|
|
SG& A
|
|
($172)
|
($197)
|
($223)
|
($251)
|
|
Depreciation
|
|
(S 71)
|
(S 75)
|
(5 80)
|
(5 85)
|
|
EBIT
|
|
$359
|
$449
|
$536
|
$628
|
(a) Compute CAG's free cash flow each year.
(b) Suppose CAG's free cash flow is expected to grow at 6% after Year 4. If CMG's after-tax
WACC is 10%, what is the value of CAG's stock?
(c) What is the value of the stock if the long-run growth rate is 5% instead of 6%?
(d) In general, under what circumstances can a firm increase its share price by cutting its dividend and investing more?
Question 2 - Portfolio Analysis
Suppose an investor currently holds the market portfolio with expected return and volatility shown below. The investor is considering investing in a venture capital fund, called "New Ventures Fund," with its respective expected return and volatility also as shown. New Ventures Fund is correlated with the market portfolio at 0.10.
| Stock |
E(R) |
SD(R |
| Market portfolio |
5.50% |
16.30% |
| New Ventures fimd |
32.50% |
323.50% |
(a) What is the target expected return for the investor if she reallocates 15% of her current investment in the market portfolio into the New Ventures fund?
(b) What is the standard deviation of the new portfolio that combines the market portfolio and New Ventures fund as you determined in (a) above?
(c) Answer whether the following statements are true (1) or false (F). Feel free to offer an explanation, if you think it is needed.
i. Diversification eliminates common, market-wide and idiosyncratic risks alike.
ii. If the Capital Asset Pricing Model (CAPM) correctly prices risk, the market portfolio of all risky securities is an efficient portfolio.
iii. Beta indicates the sensitivity of a security's returns to fluctuations in Treasury bill yields.
iv. A portfolio that includes securities sold short has negative portfolio weights for those securities.
v. An efficient portfolio is any portfolio that only contains diversifiable risk; it contains no systematic risk.