The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones.

Assume the following:

- Google had a 10% after-tax weighted average cost of capital (WACC) before it bought Motorola.
- Motorola had a 20% after-tax WACC before it merged with Google.
- Google and Motorola have the same level of gearing.
- Both companies operate in a classical tax system.

You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer.

The mobile phone manufacturing project's:

Which of the following investable assets are **NOT** suitable for valuation using PE multiples techniques?

A mature firm has constant expected future earnings and dividends. Both amounts are equal. So earnings and dividends are expected to be equal and unchanging.

Which of the following statements is **NOT** correct?

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's market capitalisation of equity?

There are a number of ways that assets can be depreciated. Generally the government's tax office stipulates a certain method.

But if it didn't, what would be the ideal way to depreciate an asset from the perspective of a businesses owner?

**Question 419** capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation

Project Data | ||

Project life | 1 year | |

Initial investment in equipment | $6m | |

Depreciation of equipment per year | $6m | |

Expected sale price of equipment at end of project | 0 | |

Unit sales per year | 9m | |

Sale price per unit | $8 | |

Variable cost per unit | $6 | |

Fixed costs per year, paid at the end of each year | $1m | |

Interest expense in first year (at t=1) | $0.53m | |

Tax rate | 30% | |

Government treasury bond yield | 5% | |

Bank loan debt yield | 6% | |

Market portfolio return | 10% | |

Covariance of levered equity returns with market | 0.08 | |

Variance of market portfolio returns | 0.16 | |

Firm's and project's debt-to-assets ratio |
50% | |

**Notes**

- Due to the project, current assets will increase by $
**5**m now (t=0) and fall by $**5**m at the end (t=1). Current liabilities will not be affected.

**Assumptions**

- The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
- Millions are represented by 'm'.
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.

What is the net present value (NPV) of the project?

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).

###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###

To value a business's assets, the free cash flow of the firm (FCFF, also called CFFA) needs to be calculated. This requires figures from the firm's income statement and balance sheet. For what figures is the balance sheet needed? Note that the balance sheet is sometimes also called the statement of financial position.

A company has:

- 10 million common shares outstanding, each trading at a price of $90.
- 1 million preferred shares which have a face (or par) value of $100 and pay a constant dividend of 9% of par. They currently trade at a price of $120 each.
- Debentures that have a total face value of $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
- The risk-free rate is 5% and the market return is 10%.
- Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.

What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.

A fairly priced stock has a beta that is the same as the market portfolio's beta. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the expected return of the stock?

**Question 738** financial statement, balance sheet, income statement

Where can a private firm's market value of equity be found? It can be sourced from the company's:

**Question 988** variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series |
|||||||||||

Sourced from Yahoo Finance Historical Price Data | |||||||||||

Date | S&P500 Index (^GSPC) | Apple (AAPL) | |||||||||

Open | High | Low | Close | Adj close | Open | High | Low | Close | Adj close | ||

2007, Wed 3 Jan | 1418 | 1429 | 1408 | 1417 | 1417 | 12.33 | 12.37 | 11.7 | 11.97 | 10.42 | |

2008, Wed 2 Jan | 1468 | 1472 | 1442 | 1447 | 1447 | 28.47 | 28.61 | 27.51 | 27.83 | 24.22 | |

2009, Fri 2 Jan | 903 | 935 | 899 | 932 | 932 | 12.27 | 13.01 | 12.17 | 12.96 | 11.28 | |

2010, Mon 4 Jan | 1117 | 1134 | 1117 | 1133 | 1133 | 30.49 | 30.64 | 30.34 | 30.57 | 26.6 | |

Source: Yahoo Finance. | |||||||||||

Which of the following statements about the above table which is used to calculate Apple's equity beta is **NOT** correct?

**Question 990** Multiples valuation, EV to EBITDA ratio, enterprise value

A firm has:

**2** million shares;

$**200** million EBITDA expected over the next year;

$**100** million in cash (not included in EV);

**1/3** market debt-to-assets ratio is (market assets = EV + cash);

**4**% pa expected dividend yield over the next year, paid annually with the next dividend expected in one year;

**2**% pa expected dividend growth rate;

**40**% expected payout ratio over the next year;

**10** times EV/EBITDA ratio.

**30**% corporate tax rate.

The stock can be valued using the EV/EBITDA multiple, dividend discount model, Gordon growth model or PE multiple. Which of the below statements is **NOT** correct based on an EV/EBITDA multiple valuation?

**Question 353** income and capital returns, inflation, real and nominal returns and cash flows, real estate

A residential investment property has an expected **nominal** total return of **6**% pa and nominal capital return of **3**% pa.

Inflation is expected to be **2**% pa. All rates are given as effective annual rates.

What are the property's expected **real** total, capital and income returns? The answer choices below are given in the same order.