Question 1
Russia invaded Ukraine on 24 February 2022. This act of aggression was condemned by the rest of the world and followed by a string of sanctions that are targeted towards Russia. Forex activities of Russian banks are curtailed. Restrictions are imposed on Russia’s oil exports. Export controls limit Russia’s access to high-tech products.
- Analyse what impact the Russia-Ukraine War has on the world economy as a whole (15 marks)
- Besides the obvious impact on Russia and Ukraine, analyse what other regions/countries and what sectors it will affect most. (15 marks)
- Discuss what you think will be the impact to the US stock (10 marks)
Question 2
Megatron is a high-tech start-up company that produces Artificial Intelligence software that can help companies fine-tune their digital marketing campaigns to bring in more results. After two years of developing the software, Megatron has just completed one full year of software sales on a commercial basis. Both profits and cash flows just barely turned positive as the company is only beginning to gain traction, and revenue is still tiny. The management of Megatron is optimistic that income and profits will grow exponentially in the next few years.
Megatron is at the point where more capital is needed to fund its growth. It has begun talks with a Venture Capital company, which suggests that they would value the company based on the Price Earnings (PE) ratio multiplied by its latest historical Net Income. It is willing to be generous in valuing Megatron at the same PE as similar listed companies.
CEO of Megatron, however, felt that perhaps the company could get a better valuation if they were to base it on a discounted cash flow method, valuing Megatron’s cash flows in the coming years.
You are Megatron’s CFO and are asked to advise the CEO.
- Appraise the two (2) valuation approaches and choose the more appropriate one in valuing Megatron, giving your reasons (20 marks)
- Examine the difficulties involved in employing the valuation method you chose above (10 marks)
Question 3
Several companies have approached Axer to acquire it. The CEO would like to prepare himself for discussions and has asked you to do a valuation of the company using the discounted cash flow approach with cash flows from the most recent financial statements as shown below:
| Profit & Loss Account for year ended 31 March 2022 | ||
| Net sales | 20,000 | |
| Cost of goods sold | – | 12,000 |
| Gross profit | 8,000 | |
| Depreciation | – | 1,200 |
| Selling expenses | – | 1,500 |
| Administrative expenses | – | 1,200 |
| EBIT | 4,100 | |
| Interest expense | – | 1,200 |
| EBT | 2,900 | |
| Tax @ 17% | 493 | |
| Net profit after tax | 2,407 | |
| Dividend paid | 2,357 | |
| Balance Sheet @ 31 March | 2021 | 2022 |
| Cash | 1,200 | 1,600 |
| Receivables | 2,400 | 2,200 |
| Inventory | 3,500 | 3,300 |
| Other current assets | 500 | 800 |
| Total current assets | 7,600 | 7,900 |
| Gross fixed assets | 18,000 | 22,000 |
| Accumulated depreciation | 5,000 | 6,200 |
| Net fixed assets | 13,000 | 15,800 |
| TOTAL ASSETS | 20,600 | 23,700 |
| Accounts payable | 2,000 | 2,200 |
| Short-term loans | 1,200 | 1,400 |
| Other current liabilities | 800 | 850 |
| Total current liabilities | 4,000 | 4,450 |
| Long-term loans | 6,400 | 7,000 |
| Share Capital | 10,000 | 12,000 |
| Retained earnings | 200 | 250 |
| TOTAL LIABILITIES & EQUITY | 20,600 | 23,700 |
- Assess the cash flows that can be used to value the entire firm (i.e., equity plus debt portion). (15 marks)
- Assess the cash flows that can be used to value the equity portion of the firm (15 marks)
Answers to Above Questions on Equity Securities
The invasion of Russia into Ukraine has a significant impact on the world economy because Russia has been an exporter of key natural resources across the world. Natural resources in the form of oil products, agricultural products, chemicals and fertilizers etc are exported by Russia to the world economy, and because of restrictions placed on Russia, there is significant impact on the export activities which has affected the world economy in a negative way. The prices of food items have increased significantly raising the inflation level across the majority of the economies around the world. The other impact of the Russia-Ukraine war includes ……..
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