1) Hooyay is a low cost manufacturer of smartphones in Myanmar. They recently listed in 2017 on the Singapore Exchange and did not issue any dividends for 2017 and have no plans to for 2018. They do believe that it would be possible to issue dividends in 2024 at a 42.5% payout ratio. Their current capital structure is 60% equity and 40% debt with a target ratio of debt to equity of .35. For 2017, they generated SGD 45,000,000 of net income on SGD85,000,000 of revenue on 10,000,000 shares that they issued. The current cost of debt is 17% with a 35% tax rate. The company is currently trading at a 2.3 Beta while the Singaporean treasury rate is at 2.5% and the market has returned 11.8% on average for the last decade. Net Income is expected to grow at 12% for the foreseeable future. (14 pts)
a. What is the cost of equity? (2 pts)
b. What is the WACC? (2 pts)
c. Using the DDM what is the firm value of the company in 2023? (2 pts)
d. Using the DDM, what is the firm value of the company at the end of 2017? (2 pts)
e. What is the share price? (2 pts)
f. What is the issue with the company growth rate? (4 pts)
2) Okamoto Industries has just published their financials for FY 2018. They generated JPY 85,450,000,000 in sales and maintained their 35% gross margin and 15% net margin. During that year the company had debt outstanding of JPY 8,232,000,000 with a 3.65% coupon rate. The company was taxed at the 21.5% rate. The company also had depreciation charges of JPY 635,000,000. Fixed capital investment was 85% of depreciation and working capital investment was 2.6% of sales. The company believes that it can maintain high growth of sales at 18% for the next five years where it will then fall to its long term growth rate of 4.5%. Both gross and net margin will decline by 1% per year (next year gross margin will be 34%) until they reach their stable levels of 30% and 10% respectively. The company will pay down debt by 500,000,000 for the next five years before reaching a sustainable debt level with the same coupon rate. Depreciation charge will decrease by 10% per year for five years. Fixed capital investment will increase by 5% relative to depreciation charge each year until it reaches 100% of depreciation charges and remain at that level. Working capital will remain 2.6% of sales. During the high growth phase, the company’s WACC is estimated to be 26.5% while the longer term WACC is calculated to be 15%. (12 pts)
a. What is the FCFF to the firm in 2018? (4 pts)
b. What is the FCFF to the firm in 2019? (4 pts)
c. What is the value of the firm using DCF valuation? (2 pts)
d. What is the equity value of the firm assuming the initial debt value is at market value? (2 pts)
3) Mercadolibre is an Argentinian based online shopping platform partially owned by Amazon. The company has had moderate success growing their topline at a steady rate of 30% while maintaining 18.5% net margins that they expect to maintain for the next three years. In year 4, residual income is expected to grow at 7.2% indefinitely. In FY 2018 they generated ARP 25,458,900,000 in revenue while their balance sheet showed that they had ARP 96,236,000,000 in assets while also having ARP 53,987,120,000 in liabilities. The company maintains a dividend policy of 4.2%. The required return on equity is 13.65%. (16 pts)
a. What is the initial Book Value of Mercadolibre? (2 pts)
b. What is the residual income in 2019? (4 pts)
c. What is the value of the company in 2018? (6 pts)
d. What would be a problem with using the residual income model for Mercadolibre? (4 pts)
4) Using the attached KMB Data sheet, please calculate the credit ratios (8 pts)
• EBIT Coverage Ratio
• EBITDA Coverage Ratio
• FFO/Total Debt
• Total Debt/EBITDA
• Net Debt/EBITDA
• ROC
• Total Debt/Capitalization
• Some Notes
o Total Debt = Short Term Debt + Long Term Debt
o For FFO/Total Debt there is no amortization expense and for now we will assume no non cash items