Valuation Approach in Corporate Finance

This report discusses the valuation approach in corporate finance and applies it to Sonic Healthcare Limited. It covers the calculation of intrinsic value, cost of equity, cost of debt, and WACC. The report concludes with recommendations for investors and the company.

Running Head: Corporate Finance
1
Project Report: Corporate Finance

Corporate Finance
2
Contents
Introduction.......................................................................................................................3
Company Overview..........................................................................................................3
Valuation...........................................................................................................................3
Conclusion........................................................................................................................8
References.........................................................................................................................9
Appendix.........................................................................................................................10

Corporate Finance
3
Introduction:
Corporate finance is an area of finance which deals in various financial action of the
company to manage the performance and position of the company in capital market. It helps
the management to improve the stakeholder’s worth in the market. In the report, the valuation
approach of corporate finance has been studied to calculate the intrinsic value of the business
and the overall performance of the company. The study has been conducted on “sonic
healthcare limited”. Financial statement and other financial factor of the business of last 5
years have been taken into concern to calculate the worth of the company.
Company Overview:
Sonic healthcare limited is a healthcare company of Australia which offers the
laboratory services, radiology services and pathology services in the Australian market.
Headquarter of the company is in New South Wales, Australia. Currently, 33000 employees
are employed by the company which are working in various branches of the company to
improve the performance and meet the common objectives of the business. Sonic healthcare
limited is largest Australian medical provider company and it falls under the third rank in US
market (Yahoo finance, 2019). Overall financial and non-financial position of the company is
quite attractive and offers better performance of the company.
Valuation:
Valuation approach is a financial method which is used by the financial analyst,
financial manager and the investors of the company to determine the actual worth of the
company (Brigham and Houston, 2012). The most common valuation approach is free cash
flow method in which various changes into the financial performance and position of the
company is historical years are considered to identify the worth of the stock of the company.
In the report, free cash flow method has applied over the business to calculate the
intrinsic value of the company. Initially, it has been found that debt amount of the company is
$ 40,23,527 thousand. Further the outstanding shares of the company are 422,212 (Annual
report, 2014, 2016 and 2018)
Further, short term growth rate and long term growth rate of the company has been
calculated to forecast the future changes of the company. On the basis of below table, it has

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been recognized that average long term growth rate of the company is 4.38% and short term
growth rate of the company is 5.07%.
Dividend growth rate (short term)
Year Dividend per share
($)
2014 0.640
2015 0.690
2016 0.710
2017 0.750
2018 0.780
Growth Rate 5.07%
(Yahoo finance, 2019)
Estimation of a discrete cash flow growth: ROE*Retention ratio
Year Net profit for
equity
($'000)
Equity
($'000)
ROE (%) Retention
ratio
Growth
rate
2014 384984 3082643 12.49% 32.47% 4.05%
2015 347698 3274128 10.62% 19.06% 2.02%
2016 451374 3662880 12.32% 51.40% 6.33%
2017 427773 3829386 11.17% 34.23% 3.82%
2018 475606 4177407 11.39% 49.53% 5.64%
Average growth of past five years 4.38%
Note: the cash flow of the company would be increased by 4.38% for
next 10 years.
(Annual report, 2018) and (World bank, 2019)
Further, in order to calculate the intrinsic value of the company, cost of equity, cost of
debt and WACC of the company has been calculated which are as follows:
Cost of Equity: CAPM model
A. Risk free rate 2.75%
B. Market rate of return 6%
C. Beta 1.04
D. CAPM 6.13%
Cost of debt:
Net finance cost ($M) 78,444.00
Less: Tax @30% 23,533.20
After tax cost of debt 54,910.80

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Borrowings amount 2,714,963.00
After tax cost of debt (%) 2.02%
(Bloomberg, 2019)
Market Value Weights
Debt Equity Total
Market value of equity
shares ($M)
11,108,397.72
Add: Retained Earnings 1,143,643.00
Value of debt (short
term borrowings+ long
term borrowings)
2,714,963.00
Total 2,714,963.00 12,252,040.72 14,967,003.72
D. Weights 0.18 0.82
Debt Ordinary
Shares
Total
Cost of Finance 2.02% 6.13%
Market Weights
0.18 0.82
WACC 0.37% 5.02% 5.38%
It explains that the cost of debt, cost of equity and WACC of the company is 6.13%,
2.02% and 5.38%.
Further, on the basis of all the above calculated data, terminal value and intrinsic
value of the company has been calculated which is as follows:
Inputs/
Assum
ption
Source
a
.
Debt $
4,023,527
2018 Annual reports
b
.
Number
of
shares
outstan
ding (in
thousan
d)
422,212 2018 Annual reports
c
.
Tax rate 30%

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d
.
Opportu
nity
cost of
capital,
percent
(r)
5.38% Seminar 6
e
.
Long-
run
growth
rate
4.38%
f
.
High
growth
period
(year)
5
g
.
Growth
rate for
high
growth
period
5.07% to
6.5%
Latest Forecast ($
thousand
s)
Year: 2018 2019 2020 2021 2022 2023 Terminal
Time 0 1 2 3 4 5 6
1 Revenu
e
Growth
5% 6.5% 6.5% 6.5% 5.1% 5.1% 4.4%
2 Revenu
e 5,476,175 5,832,126 6,211,215 6,614,944 6,950,321 7,302,702 7,622,561
3 EBITD
A
Margin
12% 10.50% 10.50% 10.50% 10.50% 10.50% 10.50%
4 EBITD
A (2*3) 657,141.0
0
612,373 652,178 694,569 729,784 766,784 800,369
5 Depreci
ation
and
Amortis
ation/R
evenue
3% 3% 3% 3% 3% 3% 3%
6 Depreci
ation
and
Amortis
ation
136,904 145,803 155,280 165,374 173,758 182,568 190,564

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7 Profit
before
tax
(EBIT)
(4 - 6)
520,237 466,570 496,897 529,195 556,026 584,216 609,805
8 Tax
156,071 139,971 149,069 158,759 166,808 175,265 182,941
9 Net
profit
after tax
before
interest
(6 - 7)
364,166 326,599 347,828 370,437 389,218 408,951 426,863
1
0
Net
WC/Re
venue
-4% -4% -4% -4% -4% -4% 0%
1
1
Net WC -
219,047.0
0
-
233,285
-
248,449
-
264,598
-
278,013
-
292,108 -
1
2
Change
in WC
-
14,238
-
15,164
-
16,149
-
13,415
-
14,095 -
1
3
%CapE
x/
Revenu
e
5% 4% 4% 4% 4% 4% 3%
1
4
Investm
ent
(capital
expendi
tures)
273,809 233,285 248,449 264,598 278,013 292,108 226,078
Free
cash
flow
253,
355
269,
823
287,
362
298
,378
313,5
06
391,
350
PV Free
cash
flow,
years 1-
5
$
1,212,152
.73
Horizon
Value
$
39,134,98
3.09
PV
Horizon
value
$
30,114,39
7.54

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PV of
compa
ny
$
31,326,55
0.27
PV of
equity
$
27,303,02
3.27
Value
per
share
$
64.67
Per
share
value
of
value
of
equity
(marke
t)
$
26.23
(Annual report, 2018)
On the basis of the overall calculations, it has been found that the intrinsic value of
the business is $ 64.67. It explains that the performance of the organization is quite better and
explains that stockholder’s worth of the corporation is quite higher. Further, the market value
of the company is $ 26.23 which is quite lower and describes that the current market position
of the company is undervalued (Yahoo finance, 2019).
This is best time for the investors to buy the stock as currently the stock price of the
business is in lower price and it would be easier for the investors of the company to buy the
stock in lower price and get higher return from the market. The associates risk with the stock
of the company is 1.04 which defines that the volatility in the stock is even higher than the
market index and leads o the higher risk but along with that, it has also been found that the
return of the company is quite higher and it would be compensated (Madura, 2011).
In case of capital structure, it has been found that the debt level could be improved by
the company in order to reduce the risk level as well as associated cost level of the company.
Overall, through the valuation calculation, it has been found that the overall market
performance of the business is quite better and worth of the company is undervalued.
Conclusion:

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To conclude, sonic health care limited is performing at better level in the market. In
terms of risk and return, company’s associated risk and cost is higher which explains that the
company is better choice for the short term investment. Further, intrinsic value of the
company defines that the market performance of the business is undervalued and hence, it is
best time for the investors to invest into the organization for higher return and better position.
overall, it is recommended to the company to maintain the capital structure through raising
the debt amount from the market and investors are recommended to invest into the company
for short run as well as long run.

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References:
Annual report. 2014. Sonic healthcare limited. Accessed on:
https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/
T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2014-annual-report-
online.pdf [available 10/5/19].
Annual report. 2016. Sonic healthcare limited. Accessed on:
https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/
T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2016-annual-report-
online-e.pdf [available 10/5/19].
Annual report. 2018. Sonic healthcare limited. Accessed on:
https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/
T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare [available 10/5/19].
Bloomberg. 2019. Australia rates and bonds. Accessed on:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia [available
10/5/19].
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Madura, J., 2011. International financial management. Cengage Learning.
World Bank. 2018. Australia GDP. Accessed on: https://data.worldbank.org/country/australia
[available 10/5/19].
Yahoo finance. 2019. Sonic healthcare limited. Accessed on:
https://finance.yahoo.com/quote/SHL.AX?p=SHL.AX [available 10/5/19].

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Appendix:
Refer to attached spreadsheet