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AFIN838 Business Valuation : Grounds of Stagnancy

Questions:

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
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
3. Estimate carefully the cost of debt, cost of equity and cost of capital for this company
4. Estimate the free cash flows of the company
5. Estimate the target price of the company, issue a buy/hold/sell recommendation to your client, and draw your conclusion.

Answers:

Estimation of Free cash flow for the company

The formula for estimation of free cash flow for the company Star Entertainment group is given by


After-tax EBIT+D&A-Capex-?NWC, EBIT means earning before interest and tax, D&A means depreciation and amortization expenditure, ?NWC means change in the net working capital.

Here, the report which has been prepared and the numbers which have been taken are on the basis of the analyst estimates and are on the basis of percentage of the sales (Goldmann, 2016). All the numbers have been taken as per the IFRS standards estimates and in arriving at the estimates, high, median and low considerations have been taken alongwith the use of the standard deviation over the past 5 years data. The growth in sales over the nest 3 years has been assumed to be 6.93%, 6.53% and 5.20% respectively over 2018, 2019 and 2020 and the growth in EBIT has been considered to be 11.11%, 8.85% and 7.01%. The continuous decrease is basically on grounds of stagnancy and huge competition in the market.

Further, depreciation has been considered on actual basis for 2017 and on estimated basis considering the decision to invest more in 2018 and on an average basis in 2019 and 2020 (Alexander, 2016). The change in the working capital has been om positive side and therefore the same has been shown as a positive figure. Further, it is expected to be the same in the coming years.

The detailed calculations have been shown in the below table:

All the assumptions have been taken as per the guidance given by the company and on the basis of the analysts view of the company (source: capitaliq.com. Further, all the estimations have been done on the basis of the long term growth rates, the lower end, higher end and the median for which is mentioned in the above table.

References

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4, 103-112.

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