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CORPFIN 4039 Equity Valuation and Analysis

  • Subject Code :  

    CORPFIN4039

  • Country :  

    AU

  • University :  

    The University of Adelaide

Answer:

Answer 1.a:

Maturity

Yld

1-year

1.726%

2-year

1.560%

3-year

1.517%

4-year

1.510%

5-year

1.520%

The table provides information on 1, 2, 3, 4, and 5-year spot rates today.

Answer 1.b:

The overall analysis indicates that the decrease in interest rate by 0.20% over the next year would mainly have an impact on the value of a bond, where buying a 1-year zero-coupon bond today and, when it matures, rolling it over into a new 1-year strip. This strategy would be helpful for a two-year investment horizon, as the investors care about the expected payoff.

Answer 1.c:

The breakeven forward rate between the two investment strategies is 1.194%, where the increment in expectation hypothesis would alter with today’s market expectation of the new 1-year interest rate to equal on July 15, 2020.

Answer 1.d:

According to the Expectations Hypothesis, today’s market expected that the new 1-year interest rate is at the level of 1.431%.

Answer 2.a:

Particulars (in million)

2022E

Revenue

950

Costs

825

Depreciation

65

Capital expenditure

90

Change in NWC

-10

Cash flow

33.00

Cash flow

33.00

Dis-rate

0.91

Dis-cash flow

30.00

Enterprise value

478.90

Debt

100.00

Cash

10.00

Equity value

388.90

Number of shares

10.00

Price per share

38.89

The overall analysis indicates that the share price of the organisation is at 38.89 when calculated using the above details. The enterprise value is calculated by using the free cash flow approach, where the debt is reduced from enterprise value and cash is added to determine the equity value of the organisation (Mielcarz and Mlinari? 2014).

Answer 2.b:

 Share price

Growth rate

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

Discount rate

8.00%

58.06

64.85

73.33

84.23

98.76

119.11

149.63

200.50

302.23

8.50%

51.96

57.46

64.18

72.58

83.38

97.78

117.94

148.18

198.58

9.00%

46.88

51.42

56.87

63.53

71.85

82.55

96.82

116.79

146.76

9.50%

42.58

46.38

50.88

56.28

62.88

71.13

81.73

95.87

115.66

10.00%

38.89

42.12

45.90

50.35

55.70

62.24

70.41

80.92

94.93

10.50%

35.69

38.47

41.68

45.41

49.83

55.13

61.61

69.71

80.12

11.00%

32.90

35.31

38.06

41.23

44.94

49.32

54.57

60.99

69.02

11.50%

30.43

32.54

34.92

37.65

40.80

44.47

48.81

54.01

60.38

12.00%

28.24

30.09

32.18

34.54

37.25

40.37

44.00

48.30

53.46

The above table provides information on sensitivity analysis, where the increment in the level of discount rate and decline in the discount rate would increase the share price value of the stock. On the other hand, with the increment in the discount rate and decline in the growth rate, the share price declined, as seen in the above table. Therefore, for increasing the share price the organisation needs to increase growth and have less discount rate over the period of the next three years.

References:

Mielcarz, P. and Mlinari?, F., 2014. The superiority of FCFF over EVA and FCFE in capital budgeting. Economic research-Ekonomska istraživanja, 27(1), pp.559-572.

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