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NUS Business School

FIN2004 Finance
Semester I 2015/2016
Group Project
You have been asked to determine whether BC Inc. is correctly priced today at $66.85 per share. To do
this, you are to use the Corporate Value Model discussed in class to estimate BC Inc.s stock price. The
companys most current Income Statement, Balance Sheet and related financial details are provided in the
Excel file BC Inc. Financials. This file also includes a tab with BCs monthly closing stock prices over
the last five years, along with those of the MSCI ACWI.
In completing this project, you will presume that CAPM is correct. You are to assume that the long-term
risk-free rate is 3.5% and the long-term market risk premium is 8.0%. As well, Cash in the firm is to be
considered Excess Cash and therefore not included in the consideration of Net Operating Working
Capital. You are also told that just last year, BC had issued 5.5million 5.5% 10-year bonds at par and the
current market price of these bonds is $975.
You are to complete the project in groups, as approved by your sectional Instructor. You will submit via
email to your respective Instructors, (i) an Excel file clearly showing your calculations and conclusions,
along with (ii) a separate report in Word or PDF explaining your methods, assumptions and results. This
Word/PDF report is to be up to a maximum of 3 pages in length; Times New Roman font size 12 with 1.5
spacing (any exhibits are to be included in a separate Appendix at the end of the document). The
submission due date and time is Monday November 16, 2015 at 11:59PM. Any late submissions will
result in a very significant penalty to the project mark.
In coming to your conclusions, it will be useful to find (i) BCs Beta (hint Excel SLOPE function is
helpful here), (ii) BCs WACC, (iii) BCs pro-forma CFFA for each of the years 2016-2020, (iv) BCs
expected Terminal Value for year ending 2020, (v) the PV of all of BCs future operating cash flows (i.e.,
of CFFAs for years 2016-2020 and its 2020 Terminal Value), (vi) BCs total firm value including its
Excess Cash (note that you are not being asked to state the firms enterprise value), (vii) BCs total
equity value, and ultimately (viii) BCs equity price per share.
(A) Is BC Inc. correctly priced? Would you give a buy recommendation on the firm? If not, what
trading strategy would you follow?
(B) Now imagine that the firm has discovered that the previously reported Excess Cash was misreported
and that the firm actually does not have any excess cash. All else remains the same in the firm. How
would your valuation of BC Inc. change? Is the firm overpriced, underpriced or correctly priced?
What trading strategy would you follow?
(C) Following your answer from part B, imagine that the firm has just agreed to take on a new separate
corporate project with an NPV of $500 million. All else remains the same in the firm. Has the firms
value changed? If yes, what is your new estimate of the firms stock price? If no, explain why there
is no change in value. Would this change your trading strategy again?