In this blog you will find the correct answer of the Coursera quiz Understanding Financial Markets coursera week 2 Quiz mixsaver always try to brings best blogs and best coupon codes
 

week- 2

Do you think company XYZ is overvalued?

 

1. In this assignment, you will apply the concepts of company valuation that you have just learned to determine whether company XYZ is overvalued.

We are currently at the end of year “t”. You performed a thorough financial analysis of XYZ and forecast the following Free Cash Flows (FCF):

Year t+1: 352 million USD
Year t+2: 385 million USD
Year t+3: 407 million USD
From year t+3 onward, you expect the FCFs to grow at a constant yearly rate of 4%.

Through your analysis, you also determined that the appropriate Weighted Average Cost of Capital (WACC) for XYZ was 11%.

Finally, you know that XYZ has 1000 million USD in debt and 100 million shares outstanding.

 

Let’s start!

2. What is the terminal value (in Year t+3)?

Please give your answer in million USD and round it to the nearest integer.

For example, if your answer is 3088 million USD, then type in “3088”.

Enter answer here

6047

3. Suppose the correct Terminal Value is 6000 million USD (i.e. discard your answer to the previous question), what is the price of 1 share of XYZ using the Discounted Cash Flow (DCF) valuation method?

Please give your answer in USD and round it to the nearest integer.

For example, if your answer is 17 USD, then type in “17”.

Enter answer here

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4. Suppose you observe that a share of XYZ is traded at a price of 35 USD on an exchange. Based on your own estimate of the price of a share of XYZ, would you say that the company is overvalued or undervalued by the market (use the price for one share that you found in the previous question to answer this question)?

 

  • The company is undervalued by the market.
  • The company is overvalued by the market.

5. You are now contemplating the following project: buying 1 share of XYZ today at 35 USD on the exchange.

What is the Net Present Value (NPV) of this project?

Please give your answer in USD.

For example, if your answer is 17 USD, then type in “17”.

(Hint: think about what the costs and benefits are for this project. For the benefits, use the price of 1 share of XYZ that you found in Question 3.)

Enter answer here

8

6. Given your answer to the previous question, what would you say about this project?

 

  • It is not a project worth pursuing because its Net Present Value is positive.
  • It is not a project worth pursuing because its Net Present Value is negative.
  • It is a project worth pursuing because its Net Present Value is negative.
  • It is a project worth pursuing because its Net Present Value (NPV) is positive.

7. Of course, you also know about the multiples-based valuation method. You would like to use this method to verify if your conclusion regarding the overvaluation or undervaluation of XYZ is correct.

On the stock exchange, companies that are comparable to XYZ (including in terms of financing structure (i.e. relative debt level)) currently have a Price/Earnings ratio of 9. XYZ’s current earnings are 400 million USD and it (still) has 100 million shares outstanding.

Based only on the information provided in this question, what is your estimate of the price of a share of XYZ in USD?

For example, if your answer is 17 USD, then type in “17”.

Enter answer here

36

8. Does this new price estimate (i.e. the one you got in the previous question) change your conclusion regarding the undervaluation or overvaluation of XYZ by the market (i.e. does it change your answer to Question 4)?

 

  • No
  • Yes

9. Suppose you have found a lower value for the price of a share of XYZ using the multiples-based method than the DCF method. Given this discrepancy, you are looking for errors you could have made in your forecasts using the DCF method.

Which of the following possible estimation errors could explain the discrepancy between the share prices you found using the DCF and multiples-based valuation methods?

(When evaluating each of the following statements, assume all other variables are held constant.)

 

  • You underestimated the Free Cash Flow (FCF) in Year t+3.
  • You overestimated the constant yearly growth rate of Free Cash Flows (FCFs) from Year t+3 onward.
  • You underestimated the Weighted Average Cost of Capital (WACC).
  • You underestimated the constant yearly growth rate of Free Cash Flows (FCFs) from Year t+3 onward.
  • You overestimated the Weighted Average Cost of Capital (WACC).

 

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