Question 1
A private equity investor is studying the company HELLO to make an investment decision.
The investor's estimates for Free Cash Flows to Firm (FCF), levels of debt and net
Financial Expenses (FE) of the company are presented in Table 1.
Table 1
Additionally, the investor has made the following assumptions: (i) risk-free interest rate:
3%; (ii) target capital structure: debt/(debt + equity) ratio of 55%; (iii) equity risk premium:
6%; (iv) asset beta: 1.15 ; and (v) tax rate: 20%. The number of shares of the company is
23000 and the current market price of HELLO is €5.2 per share.
To answer the following questions, make plausible assumptions if necessary. In case you
prefer, standard characters can be used (e.g., b rather than eta , capital_sigma rather than
Sigma .
a. Compute the yearly Equity Free Cash Flows (EFCF) for the period from 2022 until
Explain your answer.
[15 marks]
b. Assume the expected nominal growth rate of the EFCF in perpetuity is 1.75%.
Calculate the expected equity value of HELLO at year-end 2022. Present your
result rounded to one decimal place. Explain your answer.
[15 marks]
c. Considering the current market price of the company, what would be the investment
decision of the investor? Present your result rounded to one decimal place. Explain
your answer.
[10 marks]
d. Consider the following statement: "The Capital Cash Flow is a cash flow metric not
directly reflecting financing decisions and with an equity perspective". Do you agree
with this statement? Explain your answer.
Question 1
A private equity investor is studying the company HELLO to make an investment decision.
The investor's estimates for Free Cash Flows to Firm (FCF, levels of debt and net
Financial Expenses (FE of the company are presented in Table 1.
Table 1
Year 2021
Year 2022 11,200 2,200 120
Year 2023
Year 2024
Year Year 2025 2026 14,760 15,300
FCF
12,890 13,800
Level of debt
2,000
2,800
1,790
2,250
2,500
FE
145
135
120
132
3%;(ii) target capital structure: debt/debt + equity) ratio of 55%; iii) equity risk premium:
23000 and the current market price of HELLO is E5.2 per share.
To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g., b rather than , capital_sigma rather than (3 a. Compute the yearly Equity Free Cash Flows(EFCF for the period from 2022 until
2026.Explain your answer.
[15marks]
b. Assume the expected nominal growth rate of the EFCF in perpetuity is 1.75%
Calculate the expected equity value of HELLO at year-end 2022. Present your
result rounded to one decimal place.Explain your answer.
[15 marks]
C. Considering the current market price of the company, what would be the investment
decision of the investor? Present your result rounded to one decimal place.Explain
your answer.
[10 marks]
d. Consider the following statement: The Capital Cash Flow is a cash flow metric not
directly reflecting financing decisions and with an equity perspective".Do you agree
with this statement? Explain your answer.
[10 marks]
