Intrinsic Value of FCFE

The assignment content provides an analysis of the Sembcorp company's financial performance and intrinsic value using the Free Cash Flow to Equity (FCFE) approach. The FCFE per share is calculated as $0.80800, and the intrinsic value is determined to be $0.9586. A sensitivity analysis is also conducted to examine the impact of changes in growth rate assumptions on the intrinsic value. The results suggest that the company's shares are overvalued compared to their intrinsic value.

Running head: INVESTMENT PROJECT
Investment Project
Name of the Student:
Name of the University:
Author’s Note:

1INVESTMENT PROJECT
Table of Contents
Question 2..................................................................................................................................2
2.1 Dividend Valuation Model (DDM)......................................................................................2
2.1.1 Historical Growth..............................................................................................................2
2.1.2 Forecasted Growth............................................................................................................4
2.1.3 Intrinsic Value...................................................................................................................4
2.1.4 Sensitivity Analysis (Constant Growth)............................................................................5
2.2 Free Cash Flow to Equity Model (FCFE)............................................................................6
2.2.1 Historical growth rate for FCFE.......................................................................................6
2.2.2 Forecasted growth rate for FCFE......................................................................................7
2.2.3 Intrinsic Value...................................................................................................................9
2.2.4 Sensitivity Analysis for FCFE........................................................................................10
Reference and Bibliography:....................................................................................................11

2INVESTMENT PROJECT
Question 2
2.1 Dividend Valuation Model (DDM)
The Dividend Discount Model (DDM) mainly helps in identifying the overall future
value of an organisation and determines whether the current stock price is overvalued or
undervalued.
Constant Growth Rate Model
Multi-Stage Dividend Growth Rate
Model
Vj = Value of stock j
D₁ = dividend payment for next year
D0 = Dividend Payment in the current period
g = the constant growth rate of dividends
k = required rate of return of stock j
n = Number of periods
The above tangle mainly depicts the relevant formula, which could be used in
determining the intrinsic value of the company stock price. In addition, on that behalf
investors could make adequate decisions of investment (Kilic and Kaya 2015).
2.1.1 Historical Growth
Particulars 2016 2015 2014 2013 2012
Profit margin
0.055 0.048 0.100 0.102 0.101

3INVESTMENT PROJECT
Asset turnover
ratio 0.021 0.025 0.070 0.116 0.198
Equity multiplier
2.731 2.476 2.375 2.106 0.920
ROE
0.003 0.003 0.017 0.025 0.019
Particulars 2016 2015 2014 2013 2012
Dividend per share 0.08 0.11 0.16 0.17 0.15
Earnings per share 0.1992 0.2917 0.4431 0.457 0.4217
Retention rate 0.60 0.62 0.64 0.63 0.64
Particulars 2016 2015 2014 2013 2012
(Dupont) ROE
0.0536 0.0565 0.1499 0.1680 0.1830
RR
0.5984 0.6229 0.6389 0.6280 0.6443
Growth rate 3.20% 3.52% 9.58% 10.55% 11.79%
G 7.73%
Table 1: The historical growth rate of DDM (2016-2019)
(Source: As created by the author)
The table mainly depicts the relevant valuation of Sembcorp, which could be used in
the dividend discount model.

4INVESTMENT PROJECT
2.1.2 Forecasted Growth
Years 2016 2017 2018 2019
Dividend Per Shares (cents) 6.98 6.09 5.31
Earnings Per Share 0.1992 0.1690 0.1435 0.1217
ROE (Dupont) 0.0536 0.0420 0.0329 0.0258
Retention Rate 0.5984 0.5876 0.5770 0.5665
Growth Rate 3.20% 2.47% 1.90% 1.46%
Table 2: The forecast growth rate of DDM (2016-2019)
(Source: As created by the author)
The above table mainly depicts the relevant growth rate of Sembcorp from 2016 to
2019, which could be sued in determine the intrinsic value. Therefore, we assumed that a
growth rate of 3.20% (Xiong, Chen and Abbass 2014).
2.1.3 Intrinsic Value
Particulars 2016 2017 2018 2019
Dividend 0.08
Growth rate 3.20% 2.47% 1.90% 1.46%
Annuity $ 3.00
Cost of capital 18.89%
Year 2017 2018 2019
DPS at PV $0.0689 $0.0591 $0.0504
Growth Rate 2.47% 1.90% 1.46%

5INVESTMENT PROJECT
Annuity $3.00
Annuity Discounted 1.79
Intrinsic Value $1.96
Table 3: the intrinsic value of DDM
(Source: As created by the author)
The figure above, depicts that Sembcorp value is $1.96, which is much lower than the
current market price of $3.23. Hence, it is overvalued and it is advisable to sell the shares
(Paquin, Gauthier and Morin 2016).
2.1.4 Sensitivity Analysis (Constant Growth)
Sensitivity Analysis (Constant Growth)
Growth 1.41% 1.44% 1.46% 1.48% 1.51%
Ke Variation -0.05% -0.02% 0% 0.02% 0.05%
16.89% -2% 2.06271 2.06272 2.06273 2.06274 2.06276
17.89% -1% 2.01234 2.01236 2.01237 2.01238 2.01239
18.89% 0% 1.96364 1.96366 1.96367 1.96368 1.96369
19.89% 1% 1.91654 1.91655 1.91656 1.91657 1.91658
20.89% 2% 1.87096 1.87097 1.87098 1.87099 1.87100
Table 4: the sensitivity analysis of DDM
(Source: As created by the author)

6INVESTMENT PROJECT
The use of sensitivity analysis mainly helps in identifying the overall intrinsic value
of the Sembcorp, if the valuation is changed (Vajarothai, Al-Jibouri and Halman 2015).
2.2 Free Cash Flow to Equity Model (FCFE)
Free Cash Flow of Equity (FCFE) is mainly h second method, which could be used by
the investors for determining the overall share valuation.
FCFE EPS – (Capital Expenditure – Depreciation) – Change in Net Working Capital +
New Debt Issued – Debt Repayments
FCFE EPS – (Capital Expenditure – Depreciation) (1-Debt Ratio) – (Change in Working
Capital) (1-Debt Ratio)
The above table mainly states the overall formulation, which could be used in
determining the intrinsic value of the Sembcorp (Chiabai et al. 2013).
2.2.1 Historical growth rate for FCFE
Year 2016 2015 2014 2013 2012
EPS 0.1992 0.2917 0.4431 0.457 0.4217
Debt ratio (total
liabilities/total assets)
0.4884 0.6338 0.5961 0.5789 0.5252 1.3938
(1-Debt Ratio) 0.5116 0.3662 0.4039 0.4211 0.4748 -0.3938
Depreciation 1,314,318,
767
1,315,000,
000
1,720,000,
000
1,457,000,
000
1,477,000,
000
1,385,000,
000
Capital expenditure -
978,706,8
-
1,023,749,
-
1,448,277,
-
1,307,841,
-
1,156,271,
-
1,315,930,

7INVESTMENT PROJECT
81 000 000 000 000 000
Working capital (=
current assets- current
liabilities)
1,813,208,
481
1,608,
690,000
1,661,
660,000
773,
028,000
787
,737,000
1,028,68
1,000
Change in working
capital 204,518,4
81
(52,
970,000)
888,
632,000
(14,
709,000)
(240,
944,000)
FCFE 1,443,588,
346
1,313,004,
711
1,375,107,
895
2,254,636,
472
2,461,808,
917
Outstanding Shares 1,786,611,
566
1,786,556,
000
1,785,765,
000
1,786,104,
000
1,785,973,
000
FCFE Per Share 0.80800 0.73494 0.77004 1.26232 1.37841
FCFE Growth Rate 0.0994 -0.0456 -0.3900 -0.0842
Table 5: The historical growth rate of FCFE (2012-2017)
(Source: As created by the author)
The above mainly states the overall FCFE growth rate, which could be used in
determining the intrinsic value of the company (Sembcorp.com 2017).
2.2.2 Forecasted growth rate for FCFE
Year 2017 2016
EPS 0.1992

8INVESTMENT PROJECT
Debt ratio (total liabilities/total assets) 0.4884 0.6338
(1-Debt Ratio) 0.5116 0.3662
Depreciation 1,314,318,767 1,315,000,000
Capital expenditure -978,706,881 -1,023,749,000
Working capital (= current assets- current
liabilities)
1,813,208,4
81
1,608,690,00
0
Change in working capital
204,518,4
81
(52,970,00
0)
FCFE 1,443,588,346 1,313,004,711
Outstanding Shares 1,786,611,566 1,786,556,000
FCFE Per Share 0.80800 0.73494
FCFE Growth Rate 0.0994 -0.0456
Table 6: The forecasted growth rate of FCFE (2016-2017)
(Source: As created by the author)
Relevant growth rate assumption is mainly depicted in the above table, which could
be used in determining the intrinsic value of the company (Brusov et al. 2015).

9INVESTMENT PROJECT
2.2.3 Intrinsic Value
Particulars 2017
K 18.89%
Growth Rate 0.0994
FCFE Per Share 0.80800
Average growth rate -0.10509
FCFE Per Share at PV 0.9585222
Intrinsic Value 0.9585222
Table 7: The intrinsic value of FCFE
(Source: As created by the author)
The above table mainly depicts the overall formulation for determine the intrinsic
value with the help of FCFE approach. Intrinsic valuation is mainly at $0.9586, the
comparison to the current valuation is mainly at $3.23. Therefore, it can be seen that the share
of the company is overvalued (Chen et al. 2014).

10INVESTMENT PROJECT
2.2.4 Sensitivity Analysis for FCFE
Sensitivity Analysis for FCFE
Growth 9.89% 9.92% 9.94% 9.96% 9.99%
Ke Variation -0.05% -0.02% 0% 0.02% 0.05%
16.89% -2% 1.2526313 1.2564302 1.2589628 1.2614955 1.2652944
17.89% -1% 1.0829159 1.0862001 1.0883896 1.0905791 1.0938633
18.89% 0% 0.9537016 0.9565939 0.9585222 0.9604504 0.9633427
19.89% 1% 0.8520361 0.8546201 0.8563428 0.8580654 0.8606494
20.89% 2% 0.7699578 0.7722929 0.7738496 0.7754063 0.7777414
Table 8: Sensitivity Analysis of intrinsic share price
Source: As created by the author)
The overalls sensitivity analysis of the FCFE approach is mainly conducted, which
could be used by investors to determine the flections that could be conducted on the overall
valuation of the company.