AFM 273 Midterm

Student Name:
Student ID:

Date of Exam: Thursday November 4th, 2021

Start Time: 7:00pm
End Time: 8:30pm
Submission Deadline: 8:45pm
Duration: 1.5 hours
Location: Online

Format: There are 5 content specific problem tabs and 1 other short answer tab

This completed file must be submitted into the Dropbox prior to the submission deadline
It is your responsibility to submit the file and then download it from the Dropbox to verify
Multiple submissions to the Dropbox are acceptable. Only the most recent submission w
Failure to submit a file will result in a grade of "zero".

Question Outline Available MarksEarned

1 Short Answer 8 8
2 Bond Valuation 14 11
3 Stock Valuation Comps 10 10
4 Stock Valuation DDM 14 2
5 Stock Valuation DCF 21 0
6 Forecasting 12 2

79 33
short answer tab

o the submission deadline

from the Dropbox to verify you have submitted the correct version.
most recent submission will be graded.
 Answer the following questions in the shaded space provided. Ensure your answ

1. Explain the two primary factors which create a trade off as you consider the number of firms to include

We would prefer more companies from a statistical robustmess perspective

However, each additional company added to the compset is usually less comparable and poten
the results less robust

2. Under what circumstances would investors prefer that a company retain earnings as opposed to increa

As long as ROE is > Equity cost of capital, growth will be maximized through re investing profits
business.

3. Explain the concept of shared value and how it relates to the competitiveness of the firm. 2marks

The central premise behind creating shared value is that the competitiveness of a company and
the communities around it are mutually dependent.

4. Explain the impact on the bargaining power of suppliers if the two largest processors of a key raw mate

Bargaining power will increase. A dominant supplier can essentially dictate the market price.

8
ded. Ensure your answers are short and concise.

number of firms to include in the comparables set. 2marks

pective
ess comparable and potentially makes

nings as opposed to increasing the size of the dividend payments? 2marks

hrough re investing profits into the

s of the firm. 2marks

tiveness of a company and the health of

ocessors of a key raw material merge. 2 marks

dictate the market price.

 Year Revenue GDP
2001 $75.9 10581.821399
2002 $152.8 10936.419054
2003 $270.4 11458.243878
2004 $500.6 12213.729147
2005 $682.2 13036.64023
2006 $996.7 13814.611414
2007 $1,205.3 14451.858656
2008 $1,364.7 14712.844084
2009 $1,670.3 14448.933025
2010 $2,162.6 14992.052727
2011 $3,204.6 15542.581104
2012 $3,609.3 16197.007349
2013 $4,374.6 16784.849196
2014 $5,504.7 17527.163695
2015 $6,779.5 18238.300569
2016 $8,830.7 18745.075687
2017 $11,692.7 19542.979183
2018 $15,794.3 20611.860934
2019 $20,156.4 21433.224697
2020 $24,996.1 20936.6

Above is annual revenue data for Netflix and GDP for the US. You decide to test two regression forecasting models
Model A forecasts the change in revenue as a function of the percent change in revenue in the previous year, Mod
function of the percent change in revenue in the previous year and the percent change in GDP.

i. Which model (A or B) is the preferable model? Explain why. 2 marks

There is a small increase in the adjusted R2 of Model B relative to Model A suggesting that Model B has greater pow
2 in revenue. However, based on a p-value of 0.22, the % change in GDP in Model B is not statistically significant and
variable. Thus, model A is superior.

ii. Your colleague suggesst an alternative model, forecasting revenue (not the percent change in revenue) as a fu
Explain potential concerns with this approach. 2 marks

As neither revenue or GDP are stationary (both have a positive trend over time) there is the potential that they are
model may reflect a spurious relation between the two variables. The percent change in the two variables is station
approach.

iii. Use the naïve approach and the regression model approach using Model A to forecast the percent change in r
the two models is the most accurate within sample. 8 marks
 iii. Use the naïve approach and the regression model approach using Model A to forecast the percent change in r
the two models is the most accurate within sample. 8 marks

Model A has a lower average and standard deviation of standardized error comparing actual to forecasted value, th

2 Model A

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.70057380466
R Square 0.490803655776
Adjusted R Square 0.462514969986
Standard Error 0.212977369038
Observations 20

ANOVA
df SS
Regression 1 0.786976805517171
Residual 18 0.816468475005927
Total 19 1.6034452805231

Coefficients Standard Error

Intercept 0.302397209976 0.0543888183533234
Lag % Change Revenue 0.154486991623 0.0370889388193819

Model B

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.731225965617
R Square 0.534691412792
Adjusted R Square 0.479949226062
Standard Error 0.209494750481
Observations 20

ANOVA
df SS
Regression 2 0.857348422378246
Residual 17 0.746096858144852
Total 19 1.6034452805231

Coefficients Standard Error

Intercept 0.206891442841 0.0924706686881545
Lag % Change Revenue 0.152346700507 0.0365215916872833
% Change in GDP 2.651489504238 2.09394028575224
 % Change Revenue Lag % Change Revenue % Change in GDP Naïve Forecast
111.5% 617.0% 3.2% 617.02%
101.3% 111.5% 3.4% 111.49%
77.0% 101.3% 4.8% 101.29%
85.1% 77.0% 6.6% 76.96%
36.3% 85.1% 6.7% 85.13%
46.1% 36.3% 6.0% 36.28%
20.9% 46.1% 4.6% 46.09%
13.2% 20.9% 1.8% 20.94%
22.4% 13.2% -1.8% 13.22%
29.5% 22.4% 3.8% 22.39%
48.2% 29.5% 3.7% 29.48%
12.6% 48.2% 4.2% 48.18%
21.2% 12.6% 3.6% 12.63%
25.8% 21.2% 4.4% 21.20%
23.2% 25.8% 4.1% 25.83%
30.3% 23.2% 2.8% 23.16%
32.4% 30.3% 4.3% 30.26%
35.1% 32.4% 5.5% 32.41%
27.6% 35.1% 4.0% 35.08%
24.0% 27.6% -2.3% 27.62%

US. You decide to test two regression forecasting models for the % change in revenue for Netflix. The
the percent change in revenue in the previous year, Model B forecasts the change in revenue as a
s year and the percent change in GDP.

why. 2 marks

lative to Model A suggesting that Model B has greater power to explain the variability in the % change
hange in GDP in Model B is not statistically significant and thus should be excluded as a forecasting

ting revenue (not the percent change in revenue) as a function of GDP (not the change in GDP.

ositive trend over time) there is the potential that they are both increasing independently such that the
ariables. The percent change in the two variables is stationary and thus the superior modeling

proach using Model A to forecast the percent change in revenue for Netflix. Demonstrate which of
arks
proach using Model A to forecast the percent change in revenue for Netflix. Demonstrate which of
arks

tandardized error comparing actual to forecasted value, thus it is the more accurate model.

MS F Significance F
0.786976805517171 17.3498217419922 0.000581345625728118
0.0453593597225515

t Stat P-value Lower 95% Upper 95%

5.55991505481939 2.80977319436332E-05 0.188130542755317 0.41666387719764
4.16531172206742 0.000581345625728119 0.0765660226086217 0.2324079606382

MS F Significance F
0.428674211189123 9.76744709572313 0.00149899116574621
0.0438880504791089

t Stat P-value Lower 95% Upper 95%

2.23737370753346 0.0389446820303247 0.0117953855499821 0.40198750013185
4.17141459253191 0.000639919671638675 0.0752928774377276 0.22940052357592
1.26626796488849 0.222494137804801 -1.76633832969531 7.06931733817032
 Model A Forecast % Diff Naïve % Diff Model A
125.56% 453.43% 12.62%
47.46% 10.07% -53.14%
45.89% 31.61% -40.38%
42.13% -9.59% -50.51%
43.39% 134.67% 19.61%
35.84% -21.30% -22.23%
37.36% 120.14% 78.43%
33.47% 58.41% 153.25%
32.28% -40.98% 44.15%
33.70% -24.03% 14.32%
34.79% -38.82% -27.78%
37.68% 281.50% 198.38%
32.19% -40.44% 51.82%
33.52% -17.92% 29.74%
34.23% 11.54% 47.80%
33.82% -23.45% 11.77%
34.91% -6.65% 7.72%
35.25% -7.61% 0.48%
35.66% 27.01% 29.11%
34.51% 15.03% 43.72%
Average 45.63% 27.44%
St. Dev. 1.23 0.62

This is for part iii) of the question

There are 8 marks total for part iii)
6 marks are allocated for completing the above section
Allocate 1 mark for each colour coded area
The final 2 marks are allocated for the correct anysis in the shaded area
 Lower 95.0% Upper 95.0%
0.188130542755317 0.4166638772
0.0765660226086217 0.23240796064

Lower 95.0% Upper 95.0%

0.0117953855499821 0.40198750013
0.0752928774377276 0.22940052358
-1.76633832969531 7.06931733817
 1 Consider the following four bonds that pay annual coupons and have a face value of $1,000:
Calculate the price of each bond based on the current yield to maturity (YTM 1)
Calculate the price of each bond based on a forecast change in Yield to maturity (YTM 2)
Calculate the % change in price for all bonds if the Yield to maturity were to increase to YTM 2.

Years to
Bond Coupon YTM 1
maturity
A 1 0% 5.00%
B 5 6% 7.00%
6 C 10 10% 9.00%
D 20 0% 8.00%

1 b) Which bond would an investor prefer to hold for 1 year if they were forecasting rates to decrease?
Briefly explain why.

Longer term bonds are more sensitive to interest rate changes

Lower coupon bonds are more sensitive to interest rate changes
1

An investor with a 1 year time horizon purchases Bond A with a YTM of 5%. Six months later interest
The investor decides to hold the bond to maturity. What is the investor's total return on investment
c)

1 5% The ytm at the time of purchase remains constant if the bond is held to maturity

d) Assume an investor purchases Bond B today at a YTM = 7% and sells it right after the first coupon is p

959.00
933.76
60.00
Profit/Loss $ $ 34.76
Profit/Loss % 3.62%
3marks
Ie. If you did not include

e) As an investor in Corporate Bonds, what are the 2 main factors that you would be concerned about h

1. A credit rating decline

2. An increase in inflation leading to an increase in yields demanded
2
11
 a face value of $1,000: 14 marks

o maturity (YTM 2)
were to increase to YTM 2.

Price YTM 2 Price % Chg

952.38 6.00% $943.40 -0.94%

$959.00 8.00% $920.15 -4.05% $933.76 $38.85
$1,064.18 10.00% $1,000.00 -6.03%
$214.55 9.00% $178.43 -16.83%
3,190.10 $3,041.97 -27.86%
2 2 2 6 marks total

orecasting rates to decrease? Bond D 1 mark

1 mark

of 5%. Six months later interest rates increase by 1%.

tor's total return on investment for the one year period?

held to maturity 1 mark

t right after the first coupon is paid a year from now at a YTM = 8%. What is the profit or loss on this bond trade?

959.00 Price paid for Bond

933.76 Sale price of bond 1 year from now at YTM = 8%
Coupon
-$ 25.24 sale price - price paid + coupon 3 marks total
-2.63%
2marks
Ie. If you did not include the coupon, you lost 1 mark

ou would be concerned about having a negtive impact on the value of your investment?

2 marks
1 AES is a utility company that recently paid a common stock dividend of $4.65 per share. Determin
AES's common stock if its divided growth rate is expected to be $0.25/share per year for the next
year indefinitely. Its' equity cost of capital is 12 percent. Fill in all shaded cells.

Calculate the following:

Dividend per share in year 5 $ 5.90 2 marks
Dividend per share in year 10 $ 6.68 2 marks
Final Calculated Intrinsic Share Value: $55.38 2 marks
$ 67.96 6 marks total

* Note This has already been paid.

Div 4.65 4.90 5.15 5.40 5.65 5.90
Year 0 1 2 3 4 5

63.66
$55.38 4.90 5.15 5.40 5.65 69.56

2 Boyd Corp earned $5 in its' most recent year of operations. The Company has a consistent retenti
being paid out in dividends. The Company has a guaranteed contract which will deliver earnings g
years. At the conclusion of the 20 year period, the demand for the Company's product will evapo
What is the current value of the company's shares given a required rate of return equal to 10% ?

Calculate the following:

Dividend per share in year 5 $ 3.22 2 marks
PV of Dividends per share in year 5 $ 2.00 2 marks
Final Calculated Intrinsic Share Value: $40.00 2 marks
$ 45.22 6 marks total
0 1 2 3 4 5 6
EPS 5.00 5.50 6.05 6.66 7.32 8.05 8.86
DIV 2.00 2.20 2.42 2.66 2.93 3.22 3.54
PV 2.00 2.00 2.00 2.00 2.00 2.00

3 Briefly state a couple of issues that limit the use of the DDM for equity valuation
 Very few companies have a history of consistent dividend payments and are projected to continu
The value is very sensitive to the denominator assumptions.

2
4.65 per share. Determine the current intrinsic value of a share of
are per year for the next 5 years and then grow at 2.5 percent per
d cells.

6 marks total

6.05 6.20 6.35 6.51 6.68

6 7 8 9 10

y has a consistent retention ratio of 60% with the remainder

ch will deliver earnings growth of 10% per year for the next 20
any's product will evaporate and the company will shut down.
of return equal to 10% ? Fill in all shaded cells.

6 marks total
7 8 9 10 11 12 13 14 15
9.74 10.72 11.79 12.97 14.27 15.69 17.26 18.99 20.89
3.90 4.29 4.72 5.19 5.71 6.28 6.90 7.59 8.35
2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00

2 marks
are projected to continue in the future.
 16 17 18 19 20
22.97 25.27 27.80 30.58 33.64
9.19 10.11 11.12 12.23 13.45
2.00 2.00 2.00 2.00 2.00
 1 Comparative Stock Analysis 10 marks

Complete a comparative analysis on "XYZ" using the given data

Company: XYZ Symbol: XYZ

Company Key Statistics

Current Share Price $ 50.18
Dividend per share $ 2.25
Equity Cost of Capital 10%
Forecast Growth Rate 3%
Market Capitalization (bil) $ 18.96
Enterprise Value (bil) $ 28.86
Total Revenue (bil) $ 15.20
EBITDA (bil) LTM $ 2.98
EPS NTM $ 3.65
Shares Outstanding (mil) 377.87
Cash (bil) $ 5.30
Long term Debt (bil) $ 15.20
Price/Earnings 13.7
EV/EBITDA 9.7

Company Comp Set

Company Name EV/EBITDA LTM Price/ EPS ntm
Company A 8.0x 14.1x
Company B 7.7x 14.7x
Company C 4.1x 11.2x
Company D 7.8x 13.9x
Company E 12.5x 20.8x
Company F 9.9x 22.2x
Company G 13.9x 9.3x
Company H 18.3x 26.8x

Median 8.9x 14.4x

1 mark 1 mark
8 Company XYZ 9.7 13.7
 = Implied Price per Share 4 marks 2 marks
Median 44.34 52.63

Enterprise Value $ 26.66

Mkt Value of Eqty $ 16.76
Share Price (after converting Shares otstanding to bil) 44.34

2 State 2 inputs into the Comparative analysis that an equity analyst can manipulate to influence

The companies selected to be included in the compset.

The valuation metric(s) selected.
The selection of historical or forward multiples.

10
the given data. Fill in all shaded cells.
 ensure no hard coding of answers!

anipulate to influence the resulting valuation. 2 marks

1 Given the Networking Capital forecasts for Total Corp over the next 5 years, calculate the Net Prese
The Company's weighted average cost of capital is 8%. Fill in the shaded cells.

Net Working Capital Projections

Year just Forecast Year

ended 1 2 3 4
NWC 10,000 10,200 10,400 10,100 10,300
200 200 (300) 200

a) NPV (279) 2 marks

b) Will the Networking Capital requirements increase or decrease the Company's forecast free cash

Increase 1 mark

The purpose of this section is to complete an analysis on United Health Grou

company. Use the assumptions given to complete the analysis and then fill i
2

Assumptions:
Forecast FCF Growth Rate (annual)
Year 1 2021 1.00%
Year 2 2022 1.50%
Year 3 2023 2.00%
Year 4 2024 4.00%
Year 5 2025 3.00%
FCF in 2020 (billions) 11.16
FCF Growth in Perpetuity 2.50%
1 COGS as a % of Revenue 65.00%
SG&A as a % of Revenue 19.00%
Tax Rate 21.50%
Forecast EBITDA 2025 (billions) 21.20
Terminal EBITDA Multiple 12.40
Net Working Capital as of the end of 2020 (millions) 628
NWC as a % of Revenue 1.8%
Capital Expenditures as a % of Revenue 5.4%
 Cash (billions) 9
Debt (billions) 11
Current Share price 13.00
Shares Outstanding (billions) 15.00
Weighted average cost of capital Rwacc 8.00%

The purpose of this section is to foercast Unlevered Net Income for Zeel Cor
3 complete the analysis and then fill in all shaded cells on the answer chart be

Assumptions:
Forecast Sales Growth Rate (annual)
Year 1 2021 -3.00%
Year 2 2022 1.50%
Year 3 2023 2.00%
Year 4 2024 4.00%
Year 5 2025 3.00%
Sales in 2020 (billions) 20.00
FCF Growth in Perpetuity 2.50%
Interest Expense as a % of Sales 7.00%
Marketing as a % of Sales 5.00%
Direct Labour as a % of Sales 10.00%
General Administrative expenses as a % of Sales 19.00%
Tax Rate 21.50%
Raw materials as a % of Sales 30.00%
Terminal EBITDA Multiple 11.00
Net Working Capital as of the end of 2020 (millions) 360
NWC as a % of Sales 1.8%
Capital Expenditures as a % of Sales 5.4%
Cash (billions) 25
Debt (billions) 400
Current Share price 271.00
Shares Outstanding (billions) 10.00
Weighted average cost of capital Rwacc 9.00%

0
t 5 years, calculate the Net Present Value of the impact on the company's free cash flow projections.
haded cells.

5
9,500
(800)

e the Company's forecast free cashflow?

alysis on United Health Group and determine an estimate of the intrinsic value of the
te the analysis and then fill in all shaded cells on the answer chart below.

Complete the following chart: 2 marks per answer (Total of 12)

What is United Health Group's current Market Capitalization of equity? (billions) 195.00
What is the forecast FCF in 2021? (billions) 11.27
What is the forecast terminal value of the FCF in 2025 using growth in perpetuity? (billions) 232.86
What is the forecast Enterprise Value of the Company today? (billions) 205.39
What is the forecast implied equity value today? (billions) 203.68
What is the intrinsic value of the shares today? 13.58

861.78

Actual Free cashflow Forecast

2020 2021 2022 2023 2024 2025
11.16 11.27 11.44 11.66 12.13 12.49
232.86
11.27 11.44 11.66 12.13 245.35
 Enterprise Value $205.39
Equity Value $203.68
Share Value 13.58

red Net Income for Zeel Corp for the current year (2021). Use the assumptions given to
cells on the answer chart below.

Complete the following chart: 2 marks per answer (Total of 6)

What is Zeel Corp's forecast sales for 2021? (billions) 19.40

What is Zeel Corp's forecast Gross Profit for 2021? (billions) 11.64
What is Zeel Corp's forecast Unlevered Net Income for 2021? (billions) 5.48
36.52

2020 2021
Sales 20.00 19.40
Raw Materials 5.82
Direct Labour 1.94
Gross Profit 11.64
Marketing expense 0.97
General and Admin 3.69
EBT 6.98
Tax 1.50
Unlevered Net Income 5.48
3 marks

2
2
2
2
2
2

Terminal Value
2
2
2