Question 1
Different business sectors have recently been affected by disruptions to supply chains, work, and movement as well as travel restrictions. Businesses will all face a period of low demand, while some purchases that have been postponed may happen once a recovery is underway. Some sectors have good chances of catching up once supply chains are restored, subject to supply constraints. So, we can determine how each sector (or subsectors) have been impacted by the COVID-19 pandemic and forecast the likely speed of recovery of each. You are required to analyse the following sectors and answer parts (a) to (c).
- Retail
- Transportation and Logistics
- Manufacturing
- Construction
- Describe the main activities and each sector and determine three (3) main sub-sectors within each Industry/sector.
- For each sector, analyse the differences (if any) within the main sub-sectors and how the speed of recovery from the COVID-19 slowdown may differ within the sector.
- Propose one (1) sector that is likely to recover the fastest. Provide the reason(s) for your choice and a counter-argument why your choice may not be correct.
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Question 2
In a research note on the ordinary shares of the MB Fashion Group dated early July 2020 when a recent price was $7.73 and projected annual dividends were $0.05, an analyst stated a target price of $9.20. The research note did not discuss how the target price was obtained or how it should be interpreted. Assume the target price represents the expected price of MB. Analyse and indicate what further specific information would you need to form an opinion on whether the shares are overpriced, fairly priced, or underpriced? Explain why you would need the information?
Question 3
Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed below. Assume a $100 increase in each case and a 20 percent tax rate. Provide your answer in the table and show workings in an Appendix.
| $100 increase in: | Change in FCFF | Change in FCFE | |
| a) | Net income | ||
| b) | Cash operating expenses | ||
| c) | Depreciation | ||
| d) | Interest expense | ||
| e) | EBIT | ||
| f) | Accounts receivables | ||
| g) | Accounts payable | ||
| h) | Property, plant, and equipment | ||
| i) | Notes payable | ||
| j) | Cash dividends paid | ||
| k) | Proceeds from issuing new shares | ||
| l) | Common stock repurchases | ||
Question 4
SEA Group is analysing the potential takeover of Airfreight Inc. SEA Group has gathered the following data on Airfreight. All figures are in millions of dollars.
| 2019 | 2018 | 2017 | 2016 | |
| Net Income | ($26) | $34 | $18 | $26 |
| FCFE | ($1) | ($23) | $14 | ($15) |
| FCFF | $3 | $4 | $6 | $8 |
| Dividends | $5 | $5 | $4 | $4 |
| Debt to Equity | 93% | 85% | 78% | 84% |
The most appropriate model for valuing Airfreight is the:
- Free cash flow to equity model
- Dividend discount model
- Free cash flow to the firm model
Choose the best model and appraise to provide reason(s) for your choice.
