Do you think 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.

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”.

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”.

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.)

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”.

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.)