MBA 520 Module Six Forecasting Model Questions The questions that follow and the
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MBA 520 Module Six Forecasting Model Questions The questions that follow and the article Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates will inform your completion of milestone Ill An understanding of the models in this assignment will assist you in hypothesizing the incremental impact of a new investment project for the company. The understanding of these models will contribute to your ability to look toward the future when considering the direction of an organization Prompt Once you have read the article "Comparing the Accuracy and Explainability of Dividend, Free Cash 6 and 7 of your text, review and complete the questions below. Use the article and your text to inform your responses to t below. he questions Assignment Questions: 1. for models 2, 2a, and 2b: FCF ECMS-De-PS WAC FCF-(SALES,-OPEXP,-DEPEXP)(1 t) DEPEXP-AWC, CAPEXP (2a) (2b) where: vmarket value of equity at time F; SALES sales revenues for year t OPEXP, operating expenses for year t; DEPEXP -depreciation expense for year t; AWC, change in working capital in year t CAPEXP - capital expenditures in year t; ECMS,excess cash and marketable securities at time t D, PS = market value of preferred stock at time t; WnCc weighted average cost of capital; market value of debt at tine 1; = cost of debt; = cost of preferred stock; Wp proportion of debt in target capital structure twps- proportion of preferred stock in target capital structure: - proportion of equity in target capital structure; and corporate tax rate. What is the best way to minimize the weighted average cost of capital? What is the effect of the weighted average cost of capital on the market value? .Explanation / Answer
2. Relationship between book value of equity and time t-1 and market value of equity
Answer: Book Value of Equity is the carrying amount which can be seen from the latest financial statement of the entity. This is the amount at which the equity is currently recorded in the books at time t-1, that is, amount that will be recorded one year from now.
Market Value of Equity is the amount at which equity is currently available in the market, that is, basically it is the Market Price of Equity as on date.
Relationship:-
If Book Value is more than Market Value, it can be said that the Equity is underpriced and hence should be purchased immediately.
If Book Value is less than Market Value, it can be said that the Equity is overpriced and hence should be sold immediately.
If Book Value is equal to Market Value, Equity can be purchased/ sold or held by the entity at its choice.
3. Discuss Model 4 and expand on the importance and meaning of market risk premium
Answer: The above equation is Capital Asset Pricing Model (CAPM), developed by Sharpe Mossin and Lintner in 1960 which explains relationship between expected Return, non- diversifiable risk and valuation of securities. CAPM distinguishes between risk of holding single asset and holding a portfolio of assets.
Market Risk Premium is the difference of Expected return on a market portfolio and Risk free rate of return. When plotted on a graph, Market risk premium equals the slope of Security Market Line (SML). It has 3 distinct concepts which are:
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