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AFIN838 Business Valuation For Dow Jones Sustainability Index

Questions:

The report shall be structured in 5 Sections (preceded by a brief executive summary) to address the following questions of your client:

1. What are the competitive forces behind the industry’s structure? How does competition affect the margins of the industry and the company? How does the company’s profitability compare relatively to its peers (you should select between 3 and 5 industry peers)? What is the firm’s business strategy? Please highlight potential investment risks the company could face in the future (please refer to Lectures 1 and 2);

2. Analyse how the market is pricing the firm using different relative (or market) valuation techniques. Please use the same group of industry peers identified in the previous section (please refer to Lectures 3 and 4);

3. Estimate carefully the cost of debt, cost of equity and cost of capital for this company (please refer to Lectures 6 and 7);

4. Estimate the free cash flows of the company (please refer to Lectures 8 to 10);

5. Estimate the target price of the company, issue a buy/hold/sell recommendation to your client, and draw your conclusion. (please refer to Lectures 11 and 12).

Answers:

Introduction 

This study deals with a company named as Star Entertainment Group that is the worldwide leader of the casino as well as gaming business in the recent annual evaluation for the Dow Jones Sustainability Index (Starentertainmentgroup.com, 2017). The current segment explains about external competitive forces by the help of Porter’s Five Forces Model where the main components are bargaining power of suppliers, bargaining power of customers, threat of new entrants, threats of substitutes and competitive opposition. The present study analyzes the market pricing by using market valuation techniques. Cost of debt, cost of equity as well as cost of capital of Star Entertainment Group is calculated in the current assignment with proper justification. Furthermore, the study even estimates free cash flow of Star Entertainment Group in the most appropriate way (Weil, Schipper & Francis, 2013). Lastly, the study estimates the target price of Star Entertainment Group and provides recommendations on whether to buy or sell or hold to the client and drawing conclusion to it. Star Entertainment Group believes in delivering excellent results as well as enhancing shareholder value in the year 2016.

Competitive Industry Structure 

Macro-Environment Overview 

Political and Legal factors 

Star Entertainment Group analyzes various factors that either enters or invest in a certain market. Political factors plats important role for determining the factors that affect the long-term profitability of Star Entertainment Group in a specific market. Some of the political factors are as follows:

  • Industrial safety regulations in the cons

    umer services sector
  • Wage legislation that include minimum wage as well as overtime
  • Pricing regulations
  • Legal framework for contract enforcement
  • Risk of military invasion
  • Favored trading partners
  • Mandatory employee benefits

Star Entertainment Group need to take into consideration the economical factors and these are as follows:

  • Data Protection
  • Discrimination Law
  • Employment Law
  • Health and Safety Law

Economical factors 

Star Entertainment Group need to take into consideration the economical factors and these are as follows:

  • Infrastructure quality in Consumer Services Industry
  • Exchange rates as well as stability of host country currency
  • Intervention from Government
  • Rate of unemployment
  • Inflation rate
  • Discretionary income
  • Economic growth rate

Socio and Ecological factors 

Star Entertainment Group need to take into consideration the social factors and these are as follows:

  • Leisure interests
  • Demographics and skill level of the population
  • Attitudes that include health and environmental consciousness
  • Culture that include gender roles and social conventions

Star Entertainment Group need to take into consideration the ecological factors and these are as follows:

  • Climatic change
  • Endangered species
  • Laws regulating environmental pollution
  • Weather conditions
  • Recycling
  • Waste management

Technological factor 

Star Entertainment Group need to take into consideration the technological factors and these are as follows:

  • Rate of technological diffusion
  • Recent technological advancements
  • Product offerings
  • Cost structure in consumer services industry
  • Value chain structure

Industry overview 

Industry Life Cycle 

Star Entertainment Group is one of the companies that owns and control Star Sydney, Star Gold Coast as well as Treasury Brisbane (Weil, Schipper & Francis, 2013). This entertainment industry is listed in Australian Stock Exchange and has even obtained the Sheraton Grand Mirage on the Gold Coast in a joint venture as well as administers the Gold Coast Convention on behalf of the Queensland Government. The market capitalization of Star Entertainment Group is $4417 million and equivalent shares of 826 million (Reimers, 2013).

Threat of new entrants 

There is low threat from the new entrants into this entertainment industry. There are high sunk costs as well as high capital requirement to enter entertainment industry. It is difficult to access for distribution activities. Therefore, steeper learning curve is there due to mature market of this industry (Song, 2016).

Internal rivalry 

There is high level of competition within this entertainment industry.  Entertainment industry in Australia is highly fragmented as well as there is high fixed cost requirement (Weil, Schipper & Francis, 2013).

Power of buyers 

There is high bargaining power of consumer as they can easily switch channels. There is an increased globalization as well as availability of wide variety of alternative source of entertainment (Trugman. 2016).

Power of suppliers 

There is low bargaining power of suppliers as there is increased number of content providers.  

Threat of substitutes 

Substitutes of entertainment industry in Australia are film industry, print media, internet as well as significant cultural events and sporting events such as World Cup (Schipper, Francis & Weil, 2017).   

Star Entertainment Competitive Positioning and Corporate Strategy 

Corporate Strategy of Star Entertainment Group 

In the year 2016, Star Entertainment Group had brought out a new five-year sustainability policy that is known as “Our Bright Future”. The sustainability strategy of Star Entertainment Group mainly focus on building trade ability as well as delivering constant enhancement in the supervision of issues relating to environment, society and government (Bushman, 2014). The entertainment company strives to become one of the leading integrated resort companies as well as support guest wellbeing. The company believes in attracting as well as retaining talent teams and develops world-class properties (Weil, Schipper & Francis, 2013). The main priority of the company is to focus upon operational efficiencies for improving earnings. It is needed for the company to commence implementation of customer service improvement programs. The company has strong balance sheet as well as clear priorities on matters relating to leveraged assets as well as partnerships. The company has underlying earnings with a mix of resilience as well as growth where it partners with complementary skills as well as capital at the same time (Palepu, Healy & Peek, 2013).

The Star Entertainment Group is dedicated towards managing process that aligns with Environmental Management strategy. This particular company is dedicated to sustainable plan as well as retrofit in and across properties. The company expands their offerings and activating floor space and expected to consumer more energy (Callen, 2015).

Star Entertainment Group closed the targets from the financial year 2013 to 2016 as well as in the development of setting new targets as associated with the policy and expansion pipeline for supply utilization. Furthermore, the sustainable design and operational standards of Star Entertainment Group focus mainly on building world class incorporated resorts by offering contractor and supplier recommendation in areas such as water, interiors, energy, biodiversity, materials as well as best practice and innovation (Macve, 2015).

Star Entertainment Group is a principled corporate citizen as it supports the communities that it operates as well as focus on guest wellbeing. The entertainment company sustained to build on its formal company as well as society outreach projects by undertaking initiatives that include new charity partnerships. Star Entertainment Group is committed to attract, retain and develop talent as well as diverse workforce that are equipped with skills and passion for delivering guest experiences (Henderson et al. 2015).

Competitive Positioning 

Industry Peers

Country

Market Cap ($m)

Star Entertainment Group

AUS

4.67

Tatts Group

AUS

6.08

Crown Resorts Limited

AUS

7.85

Ainsworth Game Technology

AUS

754.88

The above table shows peer firms where the companies are listed in Australian Stock Exchange. The study properly explains about the company Star Entertainment Limited and compares its performance with its peer firms such as Tatts Group, Crown Resorts Limited and Ainsworth Game Technology. Both Crown Resorts Limited and Star Entertainment Limited are the largest casino operators in Australia where these firms are competing against each other to capture new opportunities. In addition, the falling Australian dollar as well as expected rising number of inbound tourists from Asia is heating the gambling as well as entertainment market as casino operators that prepares for more customers. Here, major new expenditures are planned by both Crown Resorts Limited as well as Star Entertainment Limited for refurbishing existing casinos and developing new sites over the next few years.

Investment Risks 

Star Entertainment Group Limited is trading at a 31% discount in relation to its intrinsic value. It is required to calculate expected future cash flows as well as discounted them to the value. Here, the discounted cash flow model is one of the valuation method that is used for estimating the attractiveness of an investment opportunity by taking the expected future cash flows as well as discounting them with the present value (Edwards, 2013).

The most common multiple used for stock valuation is Price to Earnings ratio for Star Entertainment Group (Weil, Schipper & Francis, 2013). This price to earnings ratio refers as current share price that aligns with market expectations based on Earnings per share. The Price to Earnings ratio of Star Entertainment Group is lower as compared to median of its peer group around 20.00. The valuation of Star Entertainment Group is based on financial metrics for the market valuation of its peer group (Easton et al. 2015).

The Price Earnings ratio of Star Entertainment Group is slightly higher than the gambling sector around 17.75. The Price Earnings ratio of Star Entertainment Group is higher than its historical 5-year average around 17.0 (Batkovsky, Batkovsky & Klochkov, 2016).

Exchange Rate Risk 

Star Entertainment Group had set a new 52-week high for today trading session when it reached 5.80. For a given period of time, the share price of Star Entertainment Group rises up to 18.80%.

Profitability Analysis 

 

 

Star

Tatts

Crown

Donaco

Ainsworth

Total Revenue

A

2268.1

2928100

3484404

201148056

282280

Gross Profit

B

 

917805

 

 

170015

EBIT

C

325

494793

595679

103415651

54881

Depreciation & Amortization

D

163.8

75219

262877

9945976

25831

EBITDA

E=C+D

488.8

570012

858556

113361627

80712

Net Profit

F

194.4

233794

378307

78873384

37930

Share Capital

G

2580.5

2854416

446763

360968368

200245

Total Assets

H

4595.4

5233373

8437351

682719484

464749

ROS

I=F/G

7.53%

8.19%

84.68%

21.85%

18.94%

Gross Profit Margin

J=B/A

0

31.3%

0

0

60.23%

EBITDA Margin

K=E/A

21.55%

19.47%

24.64%

56.36%

28.59%

TATO

L=A/H

0.494

0.560

0.413

0.295

0.607

ROA

M=F/H

4.2%

4.5%

4.5%

11.6%

8.2%

Calculation of WACC 

Particulars

Amount

Weightage

Return Rate

Weighted Cost of Capital

Equity

$3,035,400,000

80.31%

5.19%

4.17%

Interest Bearing Liabilities

$744,200,000

19.69%

7.00%

1.38%

Total Capital

$3,779,600,000

100.00%

 

5.55%

 Table: Cost of Capital of Star Entertainment Group

(Source: Created by Author)

Free Cash flow 

Particulars

Amount

EBIT

$287,100,000

Tax Rate

30%

Depreciation & amortization

$163,700,000

Non-Current Assets in 2015

$4,038,700,000

Non-Current Assets in 2014

$3,873,700,000

Capital Expenditure

$165,000,000

Current Assets in 2015

$352,700,000

Current Liabilities in 2015

$366,800,000

Working Capital in 2015

($14,100,000)

Current Assets in 2014

$344,500,000

Current Liabilities in 2014

$245,300,000

Working Capital in 2014

$99,200,000

Change in Working Capital

($113,300,000)

Free Cash Flow

$312,970,000

Table: Free cash flow of Star Entertainment Group

(Source: Created by Author)

Recommendation and Target Price

Target Price:

Particulars

Amount

Dividend paid per share

$0.11

Growth Rate

2.58%

Cost of Capital

5.55%

Target Price of the shares

$3.81

Market value of Shares

$4.33

Table: Target Price of Star Entertainment Group

(Source: Created by Author)

The above table shows the target price of Star Entertainment Group in order to undertake an analysis whether to sell or buy or hold the shares and recommend it to the client. Here, the market value of shares is $4.33 and target price of the shares is $3.81 (Damodaran, 2016). It is clearly understood that the market value of shares is more than the target price of shares and this means the company enjoying profits. Therefore, it is recommended to sell the shares as it has gained profit for the specific time frame.

Conclusion 

At the end of the study, it is concluded that Star Entertainment Group operates in the entertainment industry and occupies topmost position in this industry in Australia. The study highlights the competitive forces with the help of Porter Five forces model. Complete study had been done by calculating the financial aspects such as cost of debt, cost of equity, and cost of capital, free cash flow and target price of Star Entertainment. The information is taken from the annual reports of Star Entertainment Group. It is recommended to sell the shares as it has gained profit for current time frame. The company actually supports the main beliefs of corporate governance as well as dedicated towards maintaining highest principles. The policies as well as corporate governance practices of Star Entertainment Group are annually reviews and continue to develop and refined in order to meet the needs of the business with best practices. 

References and Bibliography 

Batkovsky, A. M., Batkovsky, M. A., & Klochkov, V. V. (2016). Implementation Risks in Investment Projects on Boosting High-Tech Business Production Capacity: Analysis and Management. Journal of Applied Economic Sciences. Romania: European Research Centre of Managerial Studies in Business Administration, 11(6), 44.

Bushman, R. M. (2014). Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58(2), 384-395.

Callen, J. L. (2015). A selective critical review of financial accounting research. Critical Perspectives on Accounting, 26, 157-167.

Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

Duan, C., Grover, V., Roberts, N., & Balakrishnan, N. (2014). Firm valuation effects of the decision to adopt relationally governed business process outsourcing arrangements. International Journal of Production Research, 52(15), 4673-4694.

Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2015). Financial statement analysis & valuation. Cambridge Business Publishers.

Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Palepu, K. G., Healy, P. M., & Peek, E. (2013). Business analysis and valuation: IFRS edition. Cengage Learning.

Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.

Reimers, J. L. (2013). Financial Accounting: Pearson New International Edition: A Business Process Approach. Pearson Higher Ed.

Schipper, K., Francis, J., & Weil, R. (2017). Financial Accounting: Introduction to Concepts, Methods and Uses. Cengage Learning.

Song, H. C. (2016). An Analysis on Difference of Convergence e-Business Valuation Factors. Journal of Digital Convergence, 14(3), 135-141.

Starentertainmentgroup.com. (2017). Starentertainmentgroup.com. Retrieved 24 October 2017, from https://www.starentertainmentgroup.com

Trugman. (2016). Understanding business valuation: A practical guide to valuing small to medium sized businesses. John Wiley & Sons.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

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