Question 1. Valuing Early Stage

a. Estimate Mindy Ltd’s terminal value based on the following information:

Current year’s net income = $20,000; next year’s expected cash flow = $26,000;

Constant future growth rate = 7%; Venture investors’ required rate of return = 20%.

 

b. In a wildly successful first year at Sachin Inc. that started and ended with no required cash, the firm has:

Operating income of $989,000, net income of $637,000;

Change in current assets of $900,000, change in current liabilities of $659,000; Net capital expenditures were $690,000, and depreciation was $460,000.

The firm has never financed itself with debt. What is its equity valuation cash flow?

 

c. Estimate Darien Ltd’s equity valuation cash flow based on the following information:

Net income = $6,372; Depreciation = $4,600;

Change in net operating working capital =$2,415;  Capital expenditures = $6,900; and  New debt issues = $1,000.

 

Question 2 Operating and Financial Performance

Russo’s company, Petrol Distribution Ltd, holds a portfolio of three assets. It wishes to invest 50 percent of his money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return. The share portfolio also has a beta coefficient of 0.5.

 

  1. Find the expected rate of return for the portfolio.
  2. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.
  3. Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above

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