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A friend of yours is trying to value the equity of a company and knowing that you have read this book has asked for your help So far she has tried to use the FCFE approach She estimated the cash

A friend of yours is trying to value the equity of a company and, knowing that you 
have read this book, has asked for your help. So far she has tried to use the FCFE 
approach. She estimated the cash flows to equity to be as follows:
Sales €800.00
− CGS −450.00
− Depreciation −80.00
− Interest −24.00
Earnings before taxes (EBT) €246.00
− Taxes (0.35 × EBT) −86.10
= Cash flow to equity €159.90
She also computed the cost of equity using CAPM as follows:
kE = kF + bE(Risk premium) = 0.06 + (1.25 × 0.084) = 0.164 or 16.4%
where, the beta is estimated for a comparable publicly traded company.
Using this cost of equity, she estimates the discount rate as
WACC = xDebtkDebt pretax(1 − t) + xos kos
 = 0.20 × 0.06 × (1 − 0.35) + 0.80 × 0.165 = 0.14, or 14%
Based on this analysis, she concludes that the value of equity is €159.9 million/0.14 =
€1 142 million.
Assuming that the numbers used in this analysis are all correct, what advice would
you give your friend regarding her analysis? 

Apr 16 2021 View more View Less

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