Finm7044 Solution
RESEARCH SCHOOL OF FINANCE, ACTUARIAL STUDIES AND APPLIED STATISTICS Second Semester 2013 Mid-Semester Examination
FINM7044/8015 APPLIED VALUATION/STRATEGY AND STRUCTURE
Study period : 10 Minutes duration Writing period : 90 Minutes duration Permitted materials: Non-programmable calculator Paper-based dictionary You must attempt to answer all questions. All questions to be completed in the script book provided.
INSTRUCTIONS: 1. This exam paper comprises a total of 4 pages. Please ensure your paper has the correct number of pages. 2. The exam includes a total of 3 questions, each containing multiple parts. You must attempt to answer all questions. 3. Do not round calculations until providing your final answer to each question. Final answers should be rounded to 2 decimal places. 4. Include all workings for each question, as marks will not be awarded for answers that do not include workings. 5. Ensure you include your student number on your answer book.
Question 1 (10 Marks) a) Beta estimation using a regression approach can sometimes give rise to the ‘standard error problem’. Describe this problem, and why it may produce a noisy beta estimate. What step may you take in order to address this? (2 Marks) b) Describe the process that you would take in estimating a firm’s cost of debt, using a synthetic rating approach. (4 Marks) c) In class, we discussed a number of possible reasons why a large proportion of projects and enterprises fail, despite having the means available to numerically value them. Describe two of these reasons. (4 Marks)
Page 2 of 10
Question 2 (12 Marks) AK Systems Ltd is a supplier of computer hardware that is currently trading at $5.50 per share. You have decided to assess whether shares in AK are undervalued using a discounted cash flow (DCF) approach. The most recent income statement, for the financial year ended 30 June 2013, indicates the following:
Revenues EBITDA EBIT EBT Net Profit
$1,650,000 860,000 660,000 442,650
FINM7044/8015 APPLIED VALUATION/STRATEGY AND STRUCTURE
Study period : 10 Minutes duration Writing period : 90 Minutes duration Permitted materials: Non-programmable calculator Paper-based dictionary You must attempt to answer all questions. All questions to be completed in the script book provided.
INSTRUCTIONS: 1. This exam paper comprises a total of 4 pages. Please ensure your paper has the correct number of pages. 2. The exam includes a total of 3 questions, each containing multiple parts. You must attempt to answer all questions. 3. Do not round calculations until providing your final answer to each question. Final answers should be rounded to 2 decimal places. 4. Include all workings for each question, as marks will not be awarded for answers that do not include workings. 5. Ensure you include your student number on your answer book.
Question 1 (10 Marks) a) Beta estimation using a regression approach can sometimes give rise to the ‘standard error problem’. Describe this problem, and why it may produce a noisy beta estimate. What step may you take in order to address this? (2 Marks) b) Describe the process that you would take in estimating a firm’s cost of debt, using a synthetic rating approach. (4 Marks) c) In class, we discussed a number of possible reasons why a large proportion of projects and enterprises fail, despite having the means available to numerically value them. Describe two of these reasons. (4 Marks)
Page 2 of 10
Question 2 (12 Marks) AK Systems Ltd is a supplier of computer hardware that is currently trading at $5.50 per share. You have decided to assess whether shares in AK are undervalued using a discounted cash flow (DCF) approach. The most recent income statement, for the financial year ended 30 June 2013, indicates the following:
Revenues EBITDA EBIT EBT Net Profit
$1,650,000 860,000 660,000 442,650