Valuation Worksheet Problems & Solutions
Q1. A stock is part of the Euronext Paris. An analyst downloads monthly returns of the stock and the index for past 2 years and performs regression analysis. The equation is given below.
X= is the regressor or predictor variable (index) and y is the response variable (stock).
y = β0 + β1 X +ε
a. What’s is beta of the stock?
b. Which variable would you use to understand the systematic risk and unsystematic risk?
Q2: Earnings before interest and taxes for a firm is S$1000. Assume tax rate to be 15%. The equipment of the firm is depreciated over 5 years using straight line method. Assume this value to be S$500 and this is the second year of depreciation. The working capital last year was S$300 and this year is S$500.
Calculate cash flow from operations. S$= Singapore Dollar.
For solution refer to the video below.
Solution:
Cash Flows from Operations = EBIT (1- Tax Rate) + Depreciation – Change in Net Working Capital
Tax Rate = 15% = 0.15=è 1 – Tax Rate = 1-0.15 = 0.85
Straight line depreciation = 500/5 = 100 per year
Change in net working capital = 500-300 = 200
An increase in net working capital shows an outflow of cash for the firm
= 1000(0.85) + 100 – 200 = 850 + 100 -200 = 750
Answers
- a. β1; b. ε represents systematic risk, and ϵ represents unsystematic risk.
Note: One question has been removed.