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INV3701 Exam Memo October 2019
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INV3701 Exam Answers for October 2019
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INV3701 Exam Memo June 2019
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MEMO – INV3701 OCT /NOV 2019MCQ QUESTIONS 1 to 30
ANSWER EXPLANATION
• Market based valuation methods such as Price multiples
1 1 are relative valuation techniques.
• 2 & 3 are Absolute valuation techniques
2 3 ERP = market return - Rf
• The value of a company (intrinsic value) under a going
3 1 concern assumption.
• Assumption: The company will continue its business
activities into the foreseeable future #focus of the module.
BYRP = Bond return + risk premium
4 1 = 1.8 +9.10 = 10.90
WACC = 0.3(8 x 0.7) +0.45 (14) +0.25 (6) = 9.48%
5 1 WACC is used as a discount rate
6 2 Value = D0 (1 + g)/ r – g
OR
Value = D1/ r – g
56(1.055)/0.082-0.55 = 54.70
After valuing the asset is it worth investing in it?
7 1 • Undervalued (MP < IV) Buy the asset,
• Overvalued (MP > IV)
• Sell it or don’t buy.
8 2 Use the basic valuation model DDM
CF0 = 0
CF1 = 1
CF2 = 1.5 + 31.50
I/YR = 7
CPT NPV = 29.76
ralphtsuro@gmail.com +27815657602
, • Undervalued (MP < IV) Buy the asset,
9 3 • Overvalued (MP > IV) Sell it or do not buy.
• Fairly valued (MP = IV). Hold or keep
10 3
Solve for g using trial and error
11 3
Constant growth model
P = D0(1+g)/ r -g
42 = 2(1+g)/0.09 -g
12 3
13 3
14 3
15 3
16 3
17 1
18 3
19 2
20 3 FCFE = NI + NCC – FC (inv) – WC (inv) + NB
NB = Weight of debt (Fixed inv-depreciation) + Weight of debt
(WC inv)
NB = 0.5(300-150) +0.5(100)
= 75 +50
= 125
FCFE = 700 +150 -300 -100 +125
= R575 million
FCFF = NI +NNC+ Int (1 -T) - FCInv - WCInv +PD
21 1 = 700 +150 +300(1-0.3) -300-100
= R660 million
22 1 VF = FCFF1 / WACC – growth
or FCFF0 (1 + g) / WACC – g
= 660(1.05)/0.1-0.05
= 13 860
ralphtsuro@gmail.com +27815657602
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