Sharren is an investment manager. Chelsea is one of her clients. In early 2021, Chelsea came to Sharren and said that she just met with a financial planner who claims to have a superior method for picking undervalued stock. According to the financial planner, the fair value of a stock can be determined by adding NOPAT with the non-cash expenses and dividing the number with the risk-free rate. Chelsea has invested 10% of her portfolio in Prodia stock (PRDA.JK). According to the financial planner, based on her valuation method, PRDA.JK is a bit overvalued. The financial planner then advises Chelsea to move her money and be her client. The following financial datas for PRDA.JK as of 31 Dec 2020 was as follow: Sales (in million IDR) : 1,873,375 Cost of revenue (in million IDR) : 827,152 Gross Profit (in million IDR) : 1,046,223 Depreciation Expenses (in million IDR) : 116,715 Operating profit (in million IDR) : 301,764 PRDA.JK current stock prices : 6,400 Chelsea asks Sharren on her opinion about the valuation method used by the financial planner. Sharren told Chelsea that it is better to use free cash flow method since it is a better value measurement.

The following statements can be used to explain why the valuation method used by the financial planner are not reasonable, except ……………..

Question

Sharren is an investment manager. Chelsea is one of her clients. In early 2021, Chelsea came to Sharren and said that she just met with a financial planner who claims to have a superior method for picking undervalued stock. According to the financial planner, the fair value of a stock can be determined by adding NOPAT with the non-cash expenses and dividing the number with the risk-free rate. Chelsea has invested 10% of her portfolio in Prodia stock (PRDA.JK). According to the financial planner, based on her valuation method, PRDA.JK is a bit overvalued. The financial planner then advises Chelsea to move her money and be her client.   The following financial datas for PRDA.JK as of 31 Dec 2020 was as follow: Sales (in million IDR)                                    : 1,873,375 Cost of revenue (in million IDR)                : 827,152 Gross Profit (in million IDR)                       : 1,046,223 Depreciation Expenses (in million IDR)    : 116,715 Operating profit (in million IDR)               : 301,764 PRDA.JK current stock prices                     : 6,400   Chelsea asks Sharren on her opinion about the valuation method used by the financial planner. Sharren told Chelsea that it is better to use  free cash flow  method since it is a better value measurement. 
 
 The following statements can be used to explain why the valuation method used by the financial planner are not reasonable,  except ……………..

Answer

Net income should be used instead of NOPAT to determine the equity value

Answer

None of the above

Answer

Stock is a risky asset, so using risk free asset as a discount rate is inappropriate

Answer

Company needs to invest to grow. Thus, investing cash flow should be taken to account as one of the value measurement.

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Sharren is an investment manager. Chelsea is one of her clients. In early 2021,...

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