BML MUNJAL UNIVERSITY

SUB CODE: FIN3701

UNIVERSITY ROLL NO

END SEMESTER EXAM, OCT 2020

COURSE - BBA/BCOM BRANCH- SEM - V
Subject: FUNDAMENTAL ANALYSIS OF STOCKS
TIME: 2 hours MAX MARKS: 50

Section-1 Attempt all questions (4 x 4 = 16)

1) The financial statements of three companies from automobile industry is given in the excel
sheet. Perform a “Valuation by Comparable” analysis by determining the price/earnings,
price/sales and price/cashflow ratios of the firms relative to each other and to the industry
average. Out of all four which of the firms seem to be overvalued? Which seem to be
undervalued? Can you think of reasons for any apparent mis-pricings?

2) Three company financial data from Pharm sector is given in the MS excel attachment. Find
the liquidity and profitability ratios for top three companies in this industry. Do the differences
make sense considering their different stages in the industry life cycle?

3) Here are four industries and four forecasts for the macroeconomy. Choose the industry that
you would expect to perform best in each scenario and why?

Industries: housing construction, health care, gold mining, steel production.

Economic Forecasts:
Deep recession: falling inflation, falling interest rates, falling GDP.
Superheated economy: rapidly rising GDP, increasing inflation and interest rates.
Healthy expansion: rising GDP, mild inflation, low unemployment.
Stagflation: falling GDP, high inflation.

4) Use data given in the Q-1 to find the dividend per share and current market price of Maruti
Suzuki India Limited. Assume that the dividend is expected to grow at a rate of 5% indefinitely.
What is the required return applicable to the investment based on the constant-growth dividend
discount model (DDM)?

Section-2 Attempt all questions (6 x 3 = 18)

1) From the data provided in the excel sheet, calculate the price-earnings ratio of Adobe
Systems (ADBE) and American Electric Power (AEP).
a. Which of these two firms seems to be more of a “growth stock”?
b. Consider 5% as the growth rate in their future earnings. Assume that the current dividend per
share for Adobe is $6 per share and American Electric Power is $3 per share. What is the present
value of growth opportunities (PVGO) for each firm as a fraction of the stock price?
(Assume, for simplicity, that the required rate of return on the stocks is r = 8%.)
c. Are the relative values you obtain for PVGO consistent with the P/E ratios?
2) The following are the projected cash flows to equity and to the firm over the next five years:

CF to CF to
Year Int (1-t)
Equity Firm
1 $250.00 $90.00 $340.00
2 $262.50 $94.50 $357.00
3 $275.63 $99.23 $374.85
4 $289.41 $104.19 $393.59
5 $303.88 $109.40 $413.27
Terminal
$3,946.50 $6,000.00
Value

(The terminal value is the value of the equity or firm at the end of year 5.)

The firm has a cost of equity of 12% and a cost of capital of 9.94%.

Answer the following questions:

A. What is the value of the equity in this firm?

B. What is the value of the firm?

3) The cash flow statement of Adobe Systems is given in the excel sheet :

Answer the following questions about the firm’s cash flow activities.
a. Did the firm have positive or negative cash flow from operations?
b. Did the firm invest in or sell off long-term investments?
c. What were the major sources of financing for the firm?
d. What was the net change in cash?

Also, answer these questions:

e. How liquid is the firm?
f. How well is the firm using its assets?
g. How effectively is the firm using leverage?
h. Is the firm profitable?

Section-3 Attempt this question (1 x 16 = 16)

Q1. The Balance sheet and Income statement of XYZ company is given below.

Balance Sheet (In millions, mn)

Assets 2015 2014
Cash $30 $15
Accounts receivable $90 $45
Inventory $120 $90
Current assets $240 $150
Gross PPE $1,200 $900
Accumulated depreciation $570 $420
Total Assets $870 $630
 Liabilities 2015 2014
Accounts payable $60 $60
Short-term debt $60 $30
Current liabilities $120 $90
Long term debt $342 $300
Common stock $150 $150
Retained earnings $258 $90
Total liabilities and Equity $870 $630

Income
Statement (In millions, mn)
2015 2014
Sales $900 $750
Cost of
goods sold $360 $300
Gross profit $540 $450
SG&A $105 $90
EBITDA $435 $360
Depreciation $150 $120
EBIT $285 $240
Interest
expense $45 $30
Pre-tax
earnings $240 $210
Taxes (30%) $72 $63
Net Income $168 $147

Assumptions:
1. Terminal value of company (at the end of 5 years) will be $200 mn.
2. Cash, Accounts receivable, inventory will increase at a moving average.
3. Gross PPE will increase at a rate of 20% and Accumulated depreciation by 5% every
year.
4. Accounts payable will increase at 5% each year.
5. Short term debt and long-term debt will increase at a moving average. Common stock
will remain constant.
6. Sales, cost of goods sold, SD&A will increase at a moving average.
7. Depreciation will remain constant at $150 mn for five years
8. Interest expense will increase at 10% every year.
9. Tax rate will remain constant.
10. All the profits are retained by the business.

Additional Information:

Cost of capital is 12%.

Question:

1. On these assumptions prepare projected Balance sheet and Income statement for the year
2016 to 2020.
2. Calculate Free Cash flows for the Year 2016 to 2020.
3. Calculate enterprise value and Fair value of the firm at the end of the year 2015.