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Itinerary of Finance
Universidad de Navarra


Rivanna Capital is a hedge fund company, whose core activity consists of creating value through the buying and selling of stocks in the market. Thecompany’s focus was on publicly traded small and midcap companies. Its basic investment rule consisted of buying stocks that were overvalued by 10% (long position) and short selling stocks whenever they were overvalued by 15% (short position).
During the summer of 2006, the company requested a value analysis of USEC, Inc. USEC’s current stock price of $10.80 was significantly below Rivanna’sevaluation of the company’s current operations and its potential to generate future cash flows ($13.1, representing a 22% undervaluation). USEC had recently undertaken the American Centrifuge Project (ACP), a massive capital-expenditure venture that could possibly have a significant impact on the business cash flow generation potential. It is possible, then, that the market expects the project toreduce the overall value of the business. A net present value as low as -$212.62 would bring Rivanna’s current stock value estimation down to the current market value. This report will analyze relevant aspects and figures of USEC to provide Rivanna with an accurate estimation of the stock value of the company in order to provide consistent advice on whether or not to buy or sell USEC stocks.Business Analysis
USEC was the world’s biggest supplier of enriched uranium fuel for nuclear power plants. It was created as a government corporation closely related to the Department of Energy (DOE). Hence, the US government’s substantial influence on its activities persisted even after the company’s privatization in 1998. The Megaton to Megawatts program, which was intermediated by USEC, signed theircommitment to buy each year (until 2012) five million pounds of raw uranium at the established (and frozen) price of $20.00 per pound. As market prices for uranium rose significantly from 2004 ($20) to 2006 ($43), this agreement would allow USEC to buy uranium at a significant market discount until 2012; uranium inventories in 2006 were already up to 29 million pounds.
As enrichment costs rosesignificantly in the Paducah facility, the ACP emerged as a potential (and expensive) alternative to reduce costs and introduce a new, energy-efficient technology that would outcome any competitor. The total set-up expenditures with ACP were estimated on $1.7 billion (of which $100 million were already sunk costs). Furthermore, the new plant was expected to start production (and depreciation) by2011, while the Paducah would be slowly put under cold standby.

USEC’s Cost of Capital
General assumptions
USEC’s cost of capital was computed using the WACC method. The corporate tax rate of 40% was assumed, in accordance with 2005 Income Statement figures. The risk-free rate was taken as the average between June and July 2006 10-year US Treasury bond rates: 5.10%. D/V was calculated usingmarket values (32%, and ensuing E/V of 68%).
Cost of Equity
The cost of equity value was arrived at using the Capital Asset Pricing Model, alongside with the corporate beta of 1.3. Rivanna’s analyst assumption of 5.50% has been taken as the market risk premium. This model produced a cost of equity of 12.25%.
Cost of debt
The cost of debt was inferred from the publicly traded 7.75% USEC debt Yieldto Maturity rate of 9.04%, ranked B- by Standard & Poor.
Weighted Average Cost of Capital
Taking the effect of corporate tax into account, the cost of capital for USEC is 10.06%.

ACP Evaluation
General assumptions
In order to take into account the effect of ACP on the corporate market value, the incremental cash flows should be brought to present value, applying the cost of capital...
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