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1.

Please construct a DCF model to value equity out of the below


inputs (please show calculations):
a. FCF (Year 1) = 100.0
b. FCF (Year 2) = 110.0
c. FCF (Year 3) = 120.0
d. FCF (Year 4) = 130.0
e. FCF (Year 5) = 140.0
f. Risk Free Rate = 3.0%
g. Beta = 1.0
h. Equity Risk Premium = 7.0%
i. Terminal growth rate = 3.0%

Cost of equity using CAPM = 3% +1 X (7%) = 10%

Discounting FCF @ COST OF EQUITY = 5 YEARS =

And applying terminal year for yr 6 onwards= 140(1+.03)/(.1-.03)

Discount the TV for 5 years and add to fcf @ cost of equity.

Answer – 1662.

2. Please construct a multiple model out of the below inputs and


determine Enterprise Value and Equity Value:
a. The subject Company is a SaaS Company
b. Revenue = $250.0M
c. EBITDA = -10.0M
d. Debt = $100.0M
e. Cash = $100.0M
f. Other Liabilities = $50.0M
g. Minority Interest = $10.0M
h. Preferred Equity = $25.0M
i. Comp Table Below

Company Industry EV/Revenues EV/EBITDA


Company 1 SaaS 8.0x 10.0x
Company 2 Automotive 0.5x 2.5x
Company 3 Consumer Discretionary 1.0x 3.0x
Company 4 SaaS 6.0x 8.0x
Company 5 Consumer Discretionary 0.5x 2.5x
Company 6 Automotive 0.2x 2.2x
Company 7 SaaS 4.0x 6.0x
Company 8 SaaS 5.0x 7.0x
Company 9 Automotive 0.3x 2.3x
Company 10 Automotive 1.0x 3.0x
Company 11 Consumer Discretionary 1.5x 3.5x
Company 12 Consumer Discretionary 1.0x 3.0x
2 answer

EV= market value of common stock + market value of preferred equity + market value of debt +
minority interest - cash and investments.

Revenue=250

Average ev/revenue for saas =


(8+6+4+5)/4
=5.75
Revenue = 250-

So( ev/revenue ) X REVENUE = EV COMPARABLE = 5.75*250


=
1437.5

Now ev/ebitda average for saas = (10+8+6+7)/4


=7.75
So
Ebitda /ev X EV = 20

3. You are asked to build out the yield with which to discount the
cash flows of a private fixed income security (bond). Select the
answer below with the most appropriate inputs to build out the
discount yield.
a. Credit Spread + Convexity Spread
b. Risk Free Rate + Credit Spread + Duration
Adjustment + Illiquid Spread
c. Risk Free Rate + Credit Spread + Convexity Adjustment +
Illiquid Spread

4. Please answer the following questions on derivatives:


a. What happens to the value of a call option when volatility
decreases?

Value of an option is directly proportional to volatility.


If volatility decreases. Value of call option decreases.

b. What happens to the value of a put option when volatility


increases?
Value of put option increases as volatility increases
c. What happens to the value of a call option when the
underlying price increases?

Call option value rises as there is higher probability of


ending in the money

d. What happens to the value of a put option when the


underlying price decreases?

Put option value rises as the underlying value decreases as


put=max(x-s,0).lower s, higher put payoff,more valuable the
option.

e. What adjustment needs to be considered when valuing a


warrant compared to an option?

Time or theta adjustment


OAS adjustment

f. If you have several call options with some in-the-money,


some out-of-the-money, and some at-the-money, which would
be the most sensitive to changes in volatility?
In the money and out of the money options are most sensitive ,
at the money is leats sensititve.

5. Walk us through how you would select comparable companies for a


private equity security that you’re trying to value with a public
market comp model. Specifically, what characteristics are you
looking at and why? The Company’s product is an app that allows
users to sing along and post their singing videos to social
media.

Look at business area


So facebook and musicall.y etc …comparable apps

Advertising revenue

6. Please select the appropriate comps from the table below for a
company you are trying to value. The Company is a medium sized
SaaS company that specializes in Finance w/expected revenue
growth of 20% and a 25% EBIT margin.

Company Industry Size Revenue Growth EBIT Margin


Company 1 SaaS-Finance Large 20% 25%
Company 2 SaaS-HR Medium 21% 24%
Company 3 SaaS-Finance Medium 22% 27%
Company 4 SaaS-HR Small 35% 5%
Company 5 SaaS-Finance Small 40% 5%
Company 6 SaaS-HR Medium 19% 26%
Company 7 SaaS-Finance Medium 19% 26%
Company 8 SaaS-HR Large 15% 28%
Company 9 SaaS-Finance Medium 24% 23%
Company 10 SaaS-Finance Small 50% 0%
Company 11 SaaS-HR Large 17% 28%
Company 12 SaaS-HR Medium 20% 25%

Ans – company 3 and 7

7. Your colleague sent a private bond model over to you for review.
The model shows the Sr. Debt yielding 14.0% and the Jr. Debt
yielding 12%.0. Would you approve this model? Why or why not?
Does this scenario provide an arbitrage opportunity? If yes, how
would you arbitrage this?

Disapprove.
Junior debt is more risky as it is not collateralized and lower
in pecking order, so more risky, so must have higher yield than
senior debt.

Arbitrage – senior debt : yield high & price low


Junior debt : yield low & price high

Buy low sell high

Start long in senior , as it is cheaper per unit , and yields


higher
Short junior , COSTLY PER UNIT And low yield.

8. You have 1,000BRL to convert into USD. The USD/BRL rate is 4.076-
to-1.0. How many US Dollars do you have upon conversion?

Bid – 4.076

Ask – 4.100

BRL TO USD – BRL/USD = 1000 / 4.076 = 245 approx


9. Your colleague sent a private convertible bond model over to you
for review. You know the following details:

a. The stock is trading at $50.0 and the conversion ratio is


23 shares.

b. There is no call protection on the bond.

c. Your colleague’s model has a valuation for the convertible


bond of $1,000.0.

Is the colleague’s model correct? Why or why not? Does this


represent an arbitrage opportunity? If yes, how would you
arbitrage this?

INCORRECT
ARBITRAGE = LONG 1 BOND = -1000
CONVERT TO STOCK AND SELL = + 23*50 = 1150
NET PROFIT 150

10. You have a convertible bond that converts into 25 shares and the
stock is trading at $50.0/share. Assuming no call protections,
what price can the convertible not be below?

50*25=1250

a. What is parity for a convertible bond?

Answer -- Parity price is the market price of the convertible security divided by the
conversion ratio

b. A convertible bond can also be viewed as a two asset


portfolio. What two assets make up that portfolio and are
they held as long and/or short positions?

BOND AND option to convert to stock.

Long bond

Long call option to buy shares and surrender bond.


11. What are some of the equity valuation techniques that you are
aware of? Under which scenario would you use the techniques
described in the previous question?

DCF , COMPARABLES, SOTP.

For previous – use comparables.

12. You have just finished building a DCF model to value a private
debt security. The details are as follows:

a. Coupon Rate = 18.0%


b. Maturity Date = 12/31/2025
c. Discount Yield = 17.8% (consisting of 3.0% risk free rate,
credit spread of 1400bps, and 80bps illiquid premium)
d. No call protection
e. The investment was made in USD, pays coupons and interest
in USD
f. The Company name is Ethiopian Oil and Gas
g. The Company issuing the bond is in Ethiopia and is in the
oil and gas sector
h. The cash flows of the bond are backed by the oil and gas
fields the Company owns
i. The Company’s fields are 90% gas and 10% oil
j. The opportunity to provide debt financing is attractive
given:
i. the high amount of reserves in the fields,
ii. the government’s use of gas to generate electricity
for its citizens,
iii. the increasing wealth of the citizens of the country
iv. the fact that the Company has long term contracts to
sell 90% of its gas to the electricity producers of
its country (the remainder is sold in the futures
market internationally)
k. The model price is $100.45.

In two to three paragraphs please write up the background and


valuation method of this security. This will be presented to the
Board of the Funds and needs to be explanatory (company
background and valuation method), but concise.