Question #59

of 140 Which of the following valuation approaches is based on the rationale that stock values differ due to differences in the expected values of variables such as sales, earnings, or related growth rates? A) Method of forecasted fundamentals. B) Free cash flow to the firm. C) Method of comparables. Beachwood Builders merged with Country Point Homes on December 31, 2003. Both companies were builders of mid-scale and luxury homes in their respective markets. On December 31, 2013, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point to its shareholders. The following information is available to Bernheim's investment bankers: Country Point's allocated common equity was $55.6 million as of December 31, 2013. Beachwood paid no dividends and has no preferred shareholders. Country Point's free cash flow (FCF) is expected to grow 7% after 2017. The current risk-free rate is 6%. The market risk premium is 11%. Beachwood Builders had 5 million common shares as of December 31, 2013. Country Point's cost of capital is equal to its return on equity at year-end (rounded to the nearest percentage point). Country Point did not have any long-term debt allocated from Beachwood. The following data for Country Point is also available for analysis: $ (in millions) 2013 2014(E) 2015(E) 2016(E) 2017(E) Net Income 10 15 20 25 30 Depreciation 5 6 5 6 5 Change in Capital Expenditures 7 8 9 10 12 Change in Working Capital 0 0 0 0 0 There are three comparable companies in Country Point's peer group: Upscale Homes, Custom Estates and Chateau One. Company Forward P/E Five-Year EPS Growth Forecast Forward PEG Upscale Homes 10.0 12.5% 0.80 Custom Estates 15.0 15.0% 1.00 Chateau One 20.0 17.5% 1.14