Calculate the payback period for the following investment. Show all your working, and state what condition

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Page 3

(b) Calculate the payback period for the following investment. Show all your working, and state what condition(s) would make this equal to the discounted payback period. State assumptions made about within-year cashflows, if any.

Cashflow -25,000 8,000 7,000 6,000 5,000 3,500

(6 marks)

6.

SECTION B - Answer only ONE question.

(a) Assume it is now year-end 2021. During the year 2021, Company X generated an EBIT of £30m. The tax rate for the year was 29%. Company X's depreciation, capital

expenditure and investment in working capital were £10m, £1.5m and £0.6m, respectively. For the next four years, Company X's EBIT is expected to grow constantly at 8% per annum. Its depreciation, capital expenditure and investment in working capital are expected to remain at a constant proportion to EBIT. The tax rate will increase to 32% effective from the beginning of 2024 (with no effect on WACC). After the fourth year, Company X's free cashflow will grow perpetually at 1%. Using a WACC of 3.5%, calculate Company X's present value. Show and annotate all your working, ensuring to spell out both acronyms mentioned in the question and others you may add to your (30 marks)

solution.

(b) If Company X has a current market value of debt of £360m, and 2,500,000 shares outstanding trading at a price of £480 per share, what can Company X's shares be described as? Show your working in reaching that conclusion. State what recommendation a stock analyst would give the company.

(6 marks)

(c) Explain what is meant by a sensitivity analysis, and describe its importance. Demonstrate, with the use of a numerical example, how it could be conducted in your valuation in (a).

(14 marks)

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