# Do you think company XYZ is overvalued?

## Do you think company XYZ is overvalued? >> Understanding Financial Markets

## 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.)