Instrastic value

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Instrastic value

Anu Bhardwaj · Accepted Answer

Given Inputs for GE (General Case) Beta : 1.9 Market risk premium (mkt_prem) : 0.08 (8%) Risk-free rate (rf) : 0.029 (2.9%) Cost of equity (k_equity) : 0.181 (18.10%) Terminal growth rate (term_gwth) : 0.105 (10.50%) Calculate Dividends and Growth Rates: Use the given dividend values and growth rates from the table. Calculate the Present Value of Cash Flows: For each year, use the formula: P V = D i v i d e n d ( 1 + k e q u i t y ) y e a r PV = \frac{Dividend}{(1 + k_{equity})^{year}} ​ Calculate Terminal Value: Use the terminal growth rate to find the terminal value at the end of the forecast period: T e r m i n a l   V a l u e = D i v i d e n d × ( 1 + t e r m _ g w t h ) k e q u i t y − t e r m _ g w t h Terminal\ Value = \frac{Dividend 	imes (1 + term\_gwth)}{k_{equity} - term\_gwth} ​ Calculate the Intrinsic Value: Sum the present values of cash flows and the present value of the terminal value. Scenario (a): Terminal Growth Rate will be 11.40% New Terminal Growth Rate : 0.114 Cost of Equity (k_equity) : 0.181 (no change) Calculate Terminal Value : Terminal Value = Dividend × ( 1 + term_gwth ) k_equity − term_gwth 	ext{Terminal Value} = \frac{	ext{Dividend} 	imes (1 + 	ext{term\_gwth})}{	ext{k\_equity} - 	ext{term\_gwth}} ​ For the terminal year (2034) Dividend = 11.06 Terminal Value = 11.06 × ( 1 + 0.114 ) 0.181 − 0.114 = 11.06 × 1.114 0.067 = 12.33164 0.067 = 184.94 	ext{Terminal Value} = \frac{11.06 	imes (1 + 0.114)}{0.181 - 0.114} = \frac{11.06 	imes 1.114}{0.067} = \frac{12.33164}{0.067} = 184.94 Calculate Present Value of Terminal Value : PV of Terminal Value = 184.94 ( 1 + 0.181 ) 15 = 184.94 7.333 = 25.21 	ext{PV of Terminal Value} = \frac{184.94}{(1 + 0.181)^{15}} = \frac{184.94}{7.333} = 25.21 Calculate Present Value of Cash Flows : Using the given Investor CF values for 2019 to 2034 and discounting them back to present value, summing them up. PV of CF = 34.91 	ext{PV of CF} = 34.91 Total Intrinsic Value : Intrinsic Value = PV of CF + PV of Terminal Value = 34.91 + 25.21 = 60.12 	ext{Intrinsic Value} = 	ext{PV of CF} + 	ext{PV of Terminal Value} = 34.91 + 25.21 = 60.12 Scenario (b): Actual Beta is 1.05 New Beta : 1.05 New Cost of Equity : k e q u i t y = 0.029 + 1.05 × 0.08 = 0.029 + 0.084 = 0.113 = 11.30 % k_{equity} = 0.029 + 1.05 	imes 0.08 = 0.029 + 0.084 = 0.113 = 11.30\% Calculate Terminal Value : Terminal Value = 11.06 × ( 1 + 0.105 ) 0.113 − 0.105 = 11.06 × 1.105 0.008 = 12.233 0.008 = 1529.125 	ext{Terminal Value} = \frac{11.06 	imes (1 + 0.105)}{0.113 - 0.105} = \frac{11.06 	imes 1.105}{0.008} = \frac{12.233}{0.008} = 1529.125 Calculate Present Value of Terminal Value : PV of Terminal Value = 1529.125 ( 1 + 0.113 ) 15 = 1529.125 4.753 = 321.67 	ext{PV of Terminal Value} = \frac{1529.125}{(1 + 0.113)^{15}} = \frac{1529.125}{4.753} = 321.67 Calculate Present Value of Cash Flows : Using the given Investor CF values for 2019 to 2034 and discounting them back to present value with new k_equity, summing them up. PV of CF = 51.24 	ext{PV of CF} = 51.24 Total Intrinsic Value : Intrinsic Value = PV of CF + PV of Terminal Value = 51.24 + 321.67 = 372.91 	ext{Intrinsic Value} = 	ext{PV of CF} + 	ext{PV of Terminal Value} = 51.24 + 321.67 = 372.91 Scenario (c): Market Risk Premium is 10.60% New Market Risk Premium : 0.106 New Cost of Equity : k e q u i t y = 0.029 + 1.9 × 0.106 = 0.029 + 0.2014 = 0.2304 = 23.04 % k_{equity} = 0.029 + 1.9 	imes 0.106 = 0.029 + 0.2014 = 0.2304 = 23.04\% Calculate Terminal Value : Terminal Value = 11.06 × ( 1 + 0.105 ) 0.2304 − 0.105 = 11.06 × 1.105 0.1254 = 12.233 0.1254 = 97.53 	ext{Terminal Value} = \frac{11.06 	imes (1 + 0.105)}{0.2304 - 0.105} = \frac{11.06 	imes 1.105}{0.1254} = \frac{12.233}{0.1254} = 97.53 Calculate the Present Value of the Terminal Value : PV of Terminal Value = 97.53 ( 1 + 0.2304 ) 15 = 97.53 25.17 = 3.87 	ext{PV of Terminal Value} = \frac{97.53}{(1 + 0.2304)^{15}} = \frac{97.53}{25.17} = 3.87 Calculate Present Value of Cash Flows : Using the given Investor CF values for 2019 to 2034 and discounting them back to present value with new k_equity, summing them up. PV of CF = 18.14 	ext{PV of CF} = 18.14 Total Intrinsic Value : Intrinsic Value = PV of CF + PV of Terminal Value = 18.14 + 3.87 = 22.01 	ext{Intrinsic Value} = 	ext{PV of CF} + 	ext{PV of Terminal Value} = 18.14 + 3.87 = 22.01 Final Answers: Scenario (a): Terminal Growth Rate will be 11.40% Intrinsic Value = 60.12 	ext{Intrinsic Value} = 60.12 Scenario (b): Actual Beta is 1.05 Intrinsic Value = 372.91 	ext{Intrinsic Value} = 372.91 Scenario (c): Market Risk Premium is 10.60% Intrinsic Value = 22.01 	ext{Intrinsic Value} = 22.01

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