Question

Recalculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet 13.2 (available at www.mhhe.com/bkm; link to Chapter 13 material). Treat each scenario independently.

a. Honda’s P/E ratio starting in 2015 will be 13.5.

b. Honda’s unlevered beta is .7.

c. The market risk premium is 8.5%.

Short answer

a. 73759 and 56058

b. 69383 and 52638

c. 69529 and 52762

Step-by-step solution

Step by Step SolutionStep 1: Given information

P/E = 13.5

beta = .7

Risk premium = 8.5%

Calculation of intrinsic value from the spreadsheet ‘a’

Let’s derive the value from the spreadsheet using the formula above

	J	K	L
36	Intrinsic value	Equity value	Intrin/share
37	73759	54759	30.26
38	56058	56058	30.97

Calculation of intrinsic value from the spreadsheet ‘b’

Let’s derive the value from the spreadsheet using the formula above

	J	K	L
36	Intrinsic value	Equity value	Intrin/share
37	69383	50383	27.64
38	52638	52638	29.08

Calculation of intrinsic value from the spreadsheet ‘c’

Let’s derive the value from the spreadsheet using the formula above

	J	K	L
36	Intrinsic value	Equity value	Intrin/share
37	69529	50529	27.92
38	52762	52762	29.15