FINC19011 - Estimation of the Value of Share
Added on 2020-03-01
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Finance
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Finance Assignment
PART A I. Estimation of the value of the share of Melbourne IT using the FEFE or free cash flow toEquity method. FCFE or free cash flow to equity can be defined as the cash flow which the entity retains aftermaking the suitable adjustments for payment of fiancé costs, debts issue and repayment od debtsfor the given financial year. FCFE, once it is determined can be used by using the discountingmethods to determine the value of an entity’s equity and consequently the value of shares issuedin the open market by the entity[ CITATION Wat12 \l 1033 ]. FEFE can be estimated suing the following method as shown below:Calculation of FCFE for Melbourne IT Company ( in $,000)20152016Net Income6,72812,708Add: Depreciation3,1633,537Less: CAPEX5,6802,850Less: Increase in net working capital25,9463,363Add: Net borrowings030,000Free cash flow to Equity (FCFE)-21,73540,032Hus the FCFE for Melbourne IT form is estimated to be ($21,735,000) in 2015 and $40,032,000in 2016.Expected growth rate of the firm = (retention ratio * ROE)ROE for the Melbourne IT form in 2016 = NI / Equity Shareholders funds = $12,708/ $145,582*100 = 8.73%[ CITATION Eit10 \l 1033 ]g = ROE ( 1 - DPS/EPS) = [8.73% * (1- 6cents /10.72 cents) ]= 8.73% * (1- .5649) = 3.79%thus, r or cost of equity of the firm is estimated to be % and the rate of growth is expected to be3.79%.Estimation of the Firms cost of Equity of discount rate for FEFE using market formulae is as follows:r = D/P + g = 6 cents/1.8 + .0379 = 7.12%[ CITATION blo17 \l 1033 ]
The value of equity of the Melbourne IT can be found out by finding the discounting of theFCFE at the rate determined under CAPM or r:EQUITY VALUE =.071240,032,00040,032,0.0379.03333$1,202,162,00000FCFErgAs estimated above the value of the Equity stocks of Melbourne IT firm is assessed to be$1,202,162,000.At present he form has total no stocks outstanding.Value of a single stock of Melbourne IT = Value of Equity/n [ CITATION DEM16 \l 1033 ] = $1,202,162,000/ 100,861,330 = $ 11.91Form the above calculations it has bene concluded that the value per share of the Melbourne ITGroup is $11.91.Working notes for FCFE Calculation of Net Working Capital 201620152014Current assets 45,85837,72039,394current liability 80,01368,51244,240NET WC-34,155-30,792-4,846Increase in WC3,36325,946calculation of Net borrowings by the Firm 201620152014Proceeds from borrowings33,50020,000Repayment of borrowings3,50020,000Net Borrowings 30,0000Calculation of Capital expenditures made 201620152014
Closing PPE6,7397,4264,909add: Depreciation 3,5373,1632,445less: Opening PPE7,4264,9092,957CAPEX2,8505,6804,397II. A Brief Analysis and comment on the dividend policy of Melbourne IT Company.Dividend policy of a firm is generally based on its earnings quality and how the same can beused to influence the stock prices of the company. A growing company in general don’t pay thehighest amount of dividend (100% of EPS) since the retained earnings can be reinvested in thebusiness to improve the margins of earnings further. However, a long existing business would bebest served if its pays a maximum amount of dividend to attract the investors and increasemarket value[ CITATION BRE10 \l 1033 ]. Melbourne IT seems to be a growing firm whose expected rate of return is much higher than thecost of equity and as a result the company is engaged in a stable and moderate dividend policy inthe last few years.The payment of dividend data of the company is provided as follows:20152016Dividend paid 5 cents6 cents As can be seen form the dividend payment data above the company has paid a total of 5 cents ofdividend in 2015 and the same increased to 6 cents in 2016. In a ASX filing the companyreported that the company’s management is currently following a stable dividend policy ofpaying a dividend of 55-75% of the EPS in each year. A stable dividend policy can be followed in many ways. He company might choose to pay afixed amount of dividends each year. Or it can also choose to pay a stable % of the EPS asdividend each year. A stable divided policy would be beneficial for a firm like Melbourne IT inthe sense that the shareholders would remain assured that they would get a minimum amount ofdividend each year. This would help in the stabilisation of the firm’s stock prices in case ofeconomic upheavals[ CITATION Rob15 \l 1033 ]. Dividends often represent an income which is received by the shareholders, the same becomes aconsideration as to whether they invest in stock of the particular company or not. If the
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