Subject 1 (30%)
Part A (22%)
The MEDCOM firm is currently selling for €32, with trailing 12-month earnings and dividends
of €1.23 and €0.64, respectively. The Price to Earnings ratio (P/E) is 26, the Price to Book
Value ratio (P/BV) is 6.5 and the Price to Sales ratio (P/S) is 2.8. The return on equity is 27
percent and the profit margin on sales is 11 percent. The Treasury bond rate is 4.5 percent, the
equity risk premium is 6 percent and MEDCOM’s beta is 1.3.
i. Calculate the MEDCOM’s required return, based on the Capital Asset Pricing Model.
ii. Assume that the dividend and earnings growth rates are 9.5%. Calculate the P/E, P/BV
and P/S ratios that would be justified given the required rate of return in i) and current
values of the dividend payout ratio, ROE and profit margin.
iii. Given that the assumptions of the constant growth model are appropriate, state whether
MEDCOM is fairly priced, overpriced, or underpriced.
Part B (8%)
You work in an Investment Bank and you have a client who has inquired about the most
suitable valuation ratio in order to compare the companies in an industry with the following
The companies in the industry are located in the USA, Japan, France and Brazil.
The industry is currently operating at a cyclical low, i.e. many companies in the industry
Determine which one of the three valuation ratios, P/E, P/BV and P/S is most appropriate for
comparing companies in this industry and advice your client.
Subject 2 (40%)
Part A (20%)
ABC Investment Bank is evaluating LaFurge Company, headquartered in Paris, France. In
2021, when ABC is performing the analysis, LaFurge is not profitable and it pays no dividends
on its common shares. ABC decides to use the forecasts of the Free Cash Flows to the Equity
to value LaFurge. To this end, the analyst makes the following assumptions:
LaFurge has 18 billion outstanding shares.
LaFurge’s sales in 2022 will be €6.5 billion and they expect to increase at 25% for the
next four years (through 2026).
The Net Income is expected to be 32% of sales.
Investment in fixed assets is expected to be 36% of sales, investment in working capital
6% of sales, and depreciation 8% of sales.
The 20% of the investment in assets will be financed with debt.
Interest expenses will be 2% of sales.
The tax rate is 10%.
LaFurge’s beta is 2.1, the risk-free rate is 4.6%, and the equity risk premium is 4%.
At the end of 2026, ABC projects that LaFurge’s price will be 17 times its Net Income.
Estimate the value per share of the LaFurge Company.
Part B (15%)
The price of WatchBit’s stock is €45. ABC Investment Bank attempts to determine whether
WatchBit is fairly priced. The financial information ABC has assembled for this valuation is
The required rates of return on WatchBit debt, common stock and preferred stock are
7%, 12% and 8%, respectively.
The target capital structure is: 30% debt, 15% preferred stock, and 55% common
The market value of debt is €145 million.
The market value of preferred stock is €65million.
The Free Cash Flow to the Firm (FCFF) for the year just ended is €28 million and is
expected to grow at a constant rate equal to 5% for the years that follow.
WatchBit has 8 million outstanding shares.
The tax rate is 30%.
Calculate the estimated value per share for WatchBit stock and decide whether it is
underpriced or overpriced.
Part C (5%)
Assume a €100 increase in the depreciation expense. Indicate the effect on this year’s Free
Cash Flow to Equity (FCFE) if the tax rate is 40% and all the other variables, including the
capital expenditures, remain constant. Explain your answer.
Subject 3 (30%)
Part A (24%)
Assume that you own shares of company “ALPHA”. The current price is € 49.84 per share,
while last week it paid a dividend of € 1.67. Consider whether you should sell your shares or
increase the number of “ALPHA” shares you hold. Based on the estimates for future dividends
you will evaluate the following scenarios:
Scenario 1: Dividends will increase over the next three years at a rate of 30%, 28% and 24%
respectively. After three years, the dividend growth rate is expected to stabilize at 8% per year.
Scenario 2: The annual dividend will remain constant (€ 1.67) for all years.
The return you require for shares in this risk category is 14%. Consider the following:
i. If scenario 1 applies, estimate the value of the “ALPHA” share today. What should be
your investment decision regarding “ALPHA” shares? Justify your answer.
ii. If the 2nd scenario applies, estimate the value of the “ALPHA” share today. What
should be your investment decision regarding “ALPHA” shares? Justify your answer.
iii. Using the forecasts of the 1st scenario calculate the share price of “ALPHA” in the 2nd
Part B (6%)
Discuss the main differences between the Dividend Discount Model and the Free Cash Flow
to Equity Discount Model.
Subject 1: Students should be able to:
Understand and implement a relative valuation framework based on P/E, P/BV, P/S.
Define, describe, analyse and apply the multiples.
Understand the fundamentals that drive the multiples.
Value a stock using the relative valuation method.
Subject 2: Students should be able to:
Apply the free cash flow to equity (FCFE) approach to estimate the value of equity of
a company and the free cash flow to firm (FCFF) approach to estimate the value of an
Calculate the cost of equity and the cost of capital, the future free cash flows based on
a growth rate, the terminal value, and then combine all these to apply the valuation
Comprehend the primary use of the valuation tools that of stock selection, i.e. apply
the tools of equity valuation and decide whether a stock is fairly priced, overpriced, or
underpriced relative to its estimated value.
Subject 3: Students should be able to:
Implement in practice the dividend discount model and its extensions in order to
evaluate the fair value of a share.
Understand the main differences between the Dividend Discount Model and the Free
Cash Flow to Equity Discount Model.
Damodaran A., 2012. Investment Valuation: Tools and Techniques for Determining the
Value of Any Asset (3rd ed.). New Jersey: John Willey and Sons, (Chapters: 1, 2, 4, 7, 8, 11,
12, 13, 14, 15).
Damodaran A., Relative Valuation
Damodaran A., Discounted Cash Flow Valuation
Damodaran A., The Dividend Discount Model
MASTER’S DEGREE PROGRAMME IN BUSINESS ADMINISTRATION
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