This homework assignment provides a solution to a company valuation problem, using the DuPont analysis and Dividend Discount Model (DDM) to examine the ROE of Flight Centre Travel Group (FLT) and estimate the intrinsic value of its shares.
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TABLE OF CONTENTS TABLE OF CONTENTS................................................................................................................2 PART 1............................................................................................................................................1 Q.4 Estimating the ROE of the company for five years by using DU PONT ROE approach....1 PART 2............................................................................................................................................2 Q.2 Estimating share price using dividend discount model (DDM) for estimating intrinsic value of the company...................................................................................................................2 REFERENCES................................................................................................................................4 APPENDIX......................................................................................................................................5
PART 1 Q.4 Estimating the ROE of the company for five years by using DU PONT ROE approach DuPont analysis sometimes also called as DuPont identity or DuPont model is a system for interpreting and analysing the fundamental performance of a company. The model was created by the Dupont Corporation way back in the year 1920. The analysis can be seen as the extended version of the examination of Return on equity (ROE) of a business entity which examines the net profit margin, asset turnover and financial leverage (Anwar, Fathoni and Gagah, 2018). In other words, it can be described as evaluating and analysing of ROE of a company for ascertaining how it can increase its return for its equity shareholders. Return on equity ( by Dupont approach)=Net profit margin* Asset turnover ratio* financial leverage = (Net profit/sales)*(sales/total assets)*(total assets/total equity) Profit margin ratio :(AUS millions) (Net profit/ sales) 20142015201620172018 Net profit206.9256.6244.6230.8262.9 sales2244.623972641.82769.72950 Profit margin ratio9.22%10.71%9.26%8.33%8.91% Total asset turnover : (sales/avg. Total assets) 20142015201620172018 sales2244.623972641.82769.72950 Average Total assets3577.73804.44397.24697.14908 Total asset turnover0.630.630.600.590.60 Financial leverage : (Total assets/total20142015201620172018 1
equity) Total assets2410.427883003.23195.53425 Total equity1097.81270.11346.91428.81535.9 Financial leverage2.202.202.232.242.23 Return on equity : ( DuPont analysis) (DuPont analysis) 20142015201620172018 Profit margin ratio9.22%10.71%9.26%8.33%8.91% Total asset turnover0.630.630.600.590.60 Financial leverage2.202.202.232.242.23 ROE12.78%14.84%12.39%11.01%11.92% WEBJET Profit margin ratio : 20142015201620172018 Net profit1918225241 sales95117152199752 Profit margin ratio20.00%15.38%14.47%26.13%5.45% Total asset turnover : 20142015201620172018 sales95117152199752 Average Total assets198.5230.5479.5624.51330.5 Total asset turnover0.480.510.320.320.57 Financial leverage : 20142015201620172018 2
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Total assets1292033784931084 Total equity6982152216443 Financial leverage1.872.482.492.282.45 DuPont Analysis 20142015201620172018 Profit margin ratio20.00%15.38%14.47%26.13%5.45% Total asset turnover0.480.510.320.320.57 Financial leverage1.872.482.492.282.45 ROE17.95%19.45%11.53%19.06%7.61% HELLO WORLD Profit margin ratio : 20142015201620172018 Net profit-63-20122232 sales286274292322323 Profit margin ratio-22.03%-73.36%0.68%6.83%9.91% Total asset turnover : 20142015201620172018 sales286274292322323 Average Total assets1146.5918.5699.59621017.5 Total asset turnover0.250.300.420.330.32 3
Financial leverage : 20142015201620172018 Total assets683471646639698 Total equity377177266279301 Financial leverage1.812.662.432.292.32 DuPont Analysis : 20142015201620172018 Profit margin ratio-22.03%-73.36%0.68%6.83%9.91% Total asset turnover0.250.30.420.330.32 Financial leverage1.812.662.432.292.32 ROE-9.97%-58.54%0.69%5.16%7.36% DuPont Analysis of FLT, Hello World and Webjet Companies (ROE) 20142015201620172018 FLT12.78%14.84%12.39%11.01%11.92% Webjet17.95%19.45%11.53%19.06%7.61% Hello World-9.97%-58.54%0.69%5.16%7.36% Interpretation: From the above DuPont analysis, it can be seen that return on equity of Flight Centre Travel Group (FLT) for the recent five years starting from 2014 to 2018 is 12.78%, 14.84%, 12.39%, 11.01%, 11.92% respectively. ROE is the ratio that measures the income earned for the shareholders against the investments made by them in the company. DuPont 4
analysis shows the ability of company to increase its return on equity. Operational efficiency is reflected from this analysis which could be used by investors in assessing the financial efficiency of the company. ROE was highest in 2015 at 14.84% which means that company earned impressive income on the investments of the shareholders as compared to other years. After the 2015, ROE has decreased to 11 % approx which depicts that company's income has decreased owing to high costof revenue which in turn has reduced theincome attributed to the shareholders in the respective years. PART 2 Q.2 Estimating share price using dividend discount model (DDM) for estimating intrinsic value of the company Dividend Discount Model is a technique of valuing an organisation's stock price which is based on the assumption that the value of the stock is worth the sum of all dividend payments in the future (Payne and et.al., 2018). P = D1/r-g p is the current stock price g is the constant growth rate r is the cost of equity Cost of equity : Dividend per share/Current market value of share+growth rate of dividends 1.67/58.42+4.52% r= 6.90% = 0.38*11.09% g= 4.52% Price of current stock = 1.67/6.90%-4.52% = 23.10 The value of stock of FLT by using DDM model is 23.10 Australian dollars The company has assumed that for the purpose of calculation of current value of stock, that value of the stock is worth the sum of all the future dividend payments (Weber, 2018). The current value of stock by using DDM is the intrinsic value of the share of the company. DIVIDEND FORECAST : 5
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YEAREquationforecastingtrend 20190.0138390.013285190.013285 20200.0138390.01328486#VALUE! 20210.0138390.01328454#VALUE! Sensitivity analysis: Formula: Current year dividend * (1+ expected growth rate)/ (expected return – expected growth rate) As listed in Appendix Sensitivity analysis :It is a technique of analysing the uncertainty in the input values for a given variable will impact the output values of a mathematical model. It is applied in different fields such as business analysis , environmental studies, investment analysis, engineering etc. The key application of sensitivity analysis its role in the decision making in an organisation (Golez and Koudijs, 2018). It assists decision analysts in understanding the uncertainties, benefits and pitfalls along with the scope of decision model. 6
REFERENCES Books and Journals Anwar, S., Fathoni, A. and Gagah, E., 2018. ANALYSIS OF THE EFFECT OF CURRENT RATIO, TOTAL TURN OVER ASSETS, DEBT TO EQUITY RATIO AND NET PROFIT MAGRIN ON CHANGES OF PROFIT WITH ON EQUITY RETURN AS INTERVENING VARIABLES ON PHARMACEUTICAL COMPANIES LISTED IN INDONESIASTOCKEXCHANGE(BEI)2013-2017PERIOD.Journalof Management.4(4). Golez, B. and Koudijs, P., 2018. Four centuries of return predictability.Journal of Financial Economics.127(2). pp.248-263. Payne, B. C. and et.al., 2018. A FINANCIAL PROFILE OF THOSE FIRMS WITH THE LOWEST COST OF EQUITY FUNDS, AND A CANONICAL RANKING OF THE RISK–RETURN FACTORS.Southeast Asia Review of Economics and Business.1(1). Weber, M., 2018. Cash flow duration and the term structure of equity returns.Journal of Financial Economics.128(3). pp.486-503. 7