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Forecasting & Valuation: A Case Study Of Cleanaway

   

Added on  2020-05-08

16 Pages3556 Words73 Views
Running Head: Forecasting & Valuation: A Case Study Of CleanawayStudent Name:Forecasting & Valuation: A Case Study Of CleanawayInstitute name:Affiliation:1

Running Head: Forecasting & Valuation: A Case Study Of CleanawayTable of Contents1.0 Introduction................................................................................................................................32.0 Forecasting:................................................................................................................................42.1 Forecasting: An Overview.....................................................................................................42.2 Sales Growth..........................................................................................................................42.3 Asset Turnover Ratio (ATO).................................................................................................52.4 Profit Margin..........................................................................................................................52.5 Net Dividend Payout Ratio....................................................................................................52.6 Cost of Debt...........................................................................................................................52.7 Cost of Equity........................................................................................................................62.8 Free Cash Flow (FCF)............................................................................................................63.0 Valuation:..................................................................................................................................73.1 Valuation: An Overview........................................................................................................73.2 Dividend Discount Model (DDM).........................................................................................73.3 Residual Income Model (RIM)..............................................................................................83.4 Residual Operating Income Model (ROIM)..........................................................................83.5 Free Cash Flow Model (FCF)................................................................................................93.6 Sensitivity Analysis: Residual Operating Income Model....................................................103.7 Recommendation.................................................................................................................104.0 Conclusion...............................................................................................................................11References......................................................................................................................................12Appendices....................................................................................................................................132

Running Head: Forecasting & Valuation: A Case Study Of Cleanaway1.0 IntroductionForecasting and valuation may be considered to be one of the most success critical roles and responsibilities of management. Efficient and effective forecasting provides the management an overview of future the financial performance of the business in terms of the projection and also contributes towards understanding a fair valuation of the stock of the firm floating in the market (Damodaran, 2016). Based on the valuation, the management may get an idea about the stock performance n the market and accordingly take the strategic decisions such as divestment, share issue, acquisition and corporate investment etc. The instant report deals with one of such case study of Cleanaway where the revenue and profit has been forecasted for next five years based on various parameters and assumptions. The report presents the brief discussion on those presumptive elements and provides an estimated revenue projection for next five years. In the next part of the study, the report attempts to value the stock of the firm applying different valuation models. In addition, the report also presents a concise sensitivity analysis on valuation and finally recommends as to whether the stock of the firm is overvalued or undervalued. At the last, the researcher wraps up the discussion by way of concluding note.3

Running Head: Forecasting & Valuation: A Case Study Of Cleanaway2.0 Forecasting:2.1 Forecasting: An OverviewForecasting is a process by which the historical data is used to identify the future trends. In the business context, the process of forecasting includes the collection of past data related to revenueor profit or any other key performance indicators (KPIs) of the business and recognize the inbuilttrend in those data set to visualize the future data. Forecasting process employs several financial tools for the purpose of such estimation. As a result, the forecasting and trend analysis may be construed to be similar at times (Yermack, 1996). It is interesting to note that the forecasting requires a lot of assumptions and the accuracy of prediction largely depends on relevance and logic behind those assumptions. The subsequent sections of the report discuss about the various assumptions behind the process of forecasting for Cleanaway. Trend analysis may be defined to be dependent on the simple formula of change in the figures as compared to previous period. For example, if the revenue is AUD 100 million in FY 2015 and the same for FY 2016 is AUD 120 million, then the growth in revenue may be calculated to 20% (i.e. excess of figures for FY 2016 over FY 2015, with reference to the figure for FY 2015). Trend=Currentyear'sdata–Previousyear'sdataPreviousyear'sdataBased on such simple formula, trend for all the below mentioned parameters have been calculated in the instant case study. In the case of multiple reporting periods, an average of all trend percentage may be considered to be overall growth rate.2.2 Sales GrowthAs discussed previously, the sales growth has been calculated using the aforementioned formula.The tables in appendices show the calculation in details. Sales growth may be construed to be thecombined effect of marketing strategy of the firm and market linked factors such as inflation, national economy and also various externalities. In the given case, the average growth rate in revenue is computed to be less than 1 %. This is because of the reason that the firm has 4

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