Problem - PrivEq operates in electrics industry. PrivEq made the projections for next five years with three different scenarios of assumptions at the beginning of Year 1. The following table shows the actual values for Year 0 and projections for Year 1 to Year 5 (amounts in thousands).
|
Actual
|
Projected
|
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Scenario 1
|
|
|
|
|
|
|
|
Net Income
|
$19,325
|
$18,553
|
$15,403
|
$21,667
|
$33,966
|
$48,830
|
|
Common Equity
|
$69,010
|
$87,563
|
$102,966
|
$124,633
|
$158,599
|
$207,429
|
|
|
Scenario 2
|
|
|
|
|
|
|
|
Net Income
|
$19,325
|
$16,918
|
$9,305
|
$9,112
|
$13,670
|
$18,747
|
|
Common Equity
|
$69,010
|
$85,928
|
$95,233
|
$104,345
|
$118,015
|
$136,762
|
|
|
Scenario 3
|
|
|
|
|
|
|
|
Net Income
|
$19,325
|
$16,033
|
$2,350
|
($4,988)
|
($7,290)
|
($9,645)
|
|
Common Equity
|
$69,010
|
$85,043
|
$87,393
|
$82,405
|
$75,115
|
$65,470
|
PrivEq is not publicly traded and therefore does not have a market equity beta. Based on the PrivEq's products, its debt structure and its income tax rate, the cost of equity has been calculated as 12.4%.
Questions:
a. Use the clean surplus accounting approach to derive the projected total amount of PrivEq's dividends to common equity shareholders in Years 1 through 5.
b. Assume that the PrivEq's value at the end of Year 5 is same as its book value at end of Year 5. Calculate the present value of the firm at the start of Year 1 for all the three scenarios.
c. Given these amounts projected for three scenarios, what would be one another parameter that could help in estimating the intrinsic value of PrivEq?