Please solve question 1 and 2 Please solve question 1 and 2

FIN 440 In Class Questions 7/3 1.) Use the below information to calculate the intrinsic value using the simple FCF model Chevron (CVX) has estimated 2019 Sales of S 176 billion with a 4% operating margin. You expect sales to grow by 4% into the future. It is in the 35% tax bracket. You estimate Capital Expenditures(CAPEX) next year of $15 billion and a depreciation expense of $19 billion. CVX has $4.8 billion in cash on hand. It\'s book value of total liabilities is $39.7 billion. You expect no change in networking capital. You calculate the WACC for ax as 7.7% and the company has 1.911 billion shares outstanding. 2.) The market price for SPC Inc is $82.00. SPC recently paid a dividend of $3.25 per share. You expect the dividend to increase by 12% per year for the next 3 years and then to grow at 4% per year for the foreseeable future. The yield on the 10 year treasury is 2.90%. You have estimated SPC\'s beta to be 1.3. The market Risk premium is 5%. A.) Using CAPM estimate the equity cost of capital for SPC B.) Calculate the estimated intrinsic value of SPC C.) Is SPC overvalued or undervalued based on your estimates.

Solution

1. Free Cash Flow= estimated Sales* opreating prfit margin* (1-tax rate)+ Depriciation-change in Capex- Change in Working Capital.

=$176*0.04*(1-0.35)+19-15-0

=$8.576 Billion

Now discounting it to the Present Value

=$8.576 Billion/(WACC-Growth Rate)

=$8.576/(0.077-0.04)= $231.7838 Bllion

Outsanding no.of shares -1.911 Billion

Thus Intrinsic value of the share = $231.7838 Billion/ 1.911 Billion= $121.2893 per share

2. A) Cost of equity using CAPM

= Risk free rate+beta* risk premium (Note- Treasury Yeild is always Risk free)

=2.9 +1.3*5=9.4%

B) Estimated Intrinsic Value= Present value of estimated Dividend

Expected Dividend in Year 1- $3.25*1.12=$3.64

Expected Dividend in Year 2- $3.64*1.12=$4.08

Expected Dividend in Year 3- $4.08*1.12=$4.57

Intrinsic Value= $3.64/(1.094)+ $4.08/(1.094^2)+ $4.57/(1.094^3)+ (($4.57*(1.04))/(0.94-0.04))/(1.094^3)

=$3.33+$3.41+$3.41+$3.49+$67.16= $77.38

C) SPC is overvalued as the current Market Price is $82 while Intrinsic Value is $77.38