Submitted by: Submitted by aaron1207
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Category: Business and Industry
Date Submitted: 11/08/2011 05:37 PM
Business Analysis and Valuation
Homework #2
Refer to the financial statements for UPS from the case, United Parcel Service’s IPO.
REQUIREMENT #1
Find the cost of equity capital (re) using the Capital Asset Pricing Model. Assumptions:
- The market premium is 6.8%
- The risk free rate is 4%
- Use the current beta for UPS. Hint: Got to Yahoo Finance, search for UPS and click on “key statistics”
IMPORTANT: Round all percentages to one (1) decimal point.
REQUIREMENT #2
Calculate abnormal earnings for three (3) years: 1999 – 2001. Assumptions:
- Net Income growth = 5%, 6% and 7% for each of the next three years
- Use the cost of equity capital (re) calculated in Requirement 1
REQUIREMENT #3
Calculate free cash flows to equity for three (3) years: 1999 – 2001. Assumptions:
- Change in long term assets = depreciation expense for 1998 for all three years (hint: use the change in accumulated depreciation)
- Change in working capital = 0
- The only change to equity is net income. The debt/equity ratio remains constant. (Hint: be sure to use both long-term debt and current maturities of short-term debt)
REQUIREMENT #4
Using an assumed perpetual growth rate of 3%, calculate the terminal value of UPS in 2001. Use free cash flows calculated in Requirement #3 in your calculation.
REQUIREMENT #5
Calculate the value of equity in 1998 using abnormal earnings for three (3) years calculated in Requirement #2.
REQUIREMENT #6
Calculate the value of equity in 1998 using free cash flows to equity for three (3) years calculated in Requirement #3.
REQUIREMENT #7
Calculate the price of a share of UPS stock in 1998 assuming the industry P/E ratio is 17.