MBA 520 ModuleSix Forecasting Model Questions  35

The questions that follow and the articleComparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimateswill inform your completion of milestone III. 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 Flow, and Abnormal Earnings Equity Value Estimates” and Chapters 6 and 7 of your text, review and complete the questions below. Use the article and your text to inform your responses to the questions below.

Assignment Questions:

1. For models 2, 2a, and 2b:

where: SALES: = OPEXP: = DEPE2CP: = a WC, = CAPEICP: = ECMS, = PS:

rexcc rD rPS WD WES WE

VFW = FCF  + ECMSF- DP- PSI. (2) t=1 (l+rwAcd FCF, = (SALES:- OPEXP,- DEPEXP,)(1 – t) + DEPEXP1 – AWC:- CAPEXP: (2a)

rwAcc = wa(1 “Ora WPSTPS WErE

market value of equity at time F; sales revenues for year t; operating expenses for year t; depreciation expense for year t; change in working capital in year t; capital expenditures in year t; excess cash and marketable securities at time 48 market value of debt at time t; market value of preferred stock at time t;

(2b)

= weighted average cost of capital; = cost of debt; = cost of preferred stock; = proportion of debt in target capital structure; = 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?

2. For models 3, 3a, and 3b:

·         What is the relationship between book value of equity and time t-1 and the market value of the equity?

3. Discuss model 4 and expand on the importance and the meaning of the market risk premium.

4. In your own words, what are the main conclusions for this article, and what could be improved upon in its analysis?