1.Justification of Variables & ProxiesIn calculating Thomas Cook’s value through the SVA model, a number of key variables wereemployed (Figure 1). A conservative growth rate of 5.3% was calculated over a 6 year period(Figure 2). New challenges facing the UK airline industry may cast doubts as to how ThomasCook could maintain a growth rate of 5.3%, albeit a very modest growth rate. According tothe CEO of Thomas Cook - Sam Wiehagen, an innovative turnaround programme is to beimplemented, that promises to maintain steady sales growth over challenging times by“refocusing product strategy, improving yield management and rationalising distribution...”(Thomas Cook’s Annual Report, 2011, p. 8). The reasoning behind the assumption that operating profit margins will remain constant at2% (Figure 3) is hinged on the firm’s ambitious synergy plan that seeks to unlock a cost-saving of £35m per annum. By joining seventy-one aircrafts within a common fleet, the firmnow commands stronger control over its activities and fuel purchases which leads toincremental cost-savings of around £19m (Thomas Cook’s Annual Report, 2010). Plans arealready in motion to purchase catering and support services more efficiently, which willdeliver greater reduction in operating costs and in turn preserve a steady growth in operatingmargins for the coming financial years. A small incremental capital investment of 2.4% (Figure 4) is consistent with the firm’s recentshift towards online operations (Topham, 2012), a move that warrants fewer capitalinvestments in the way of fixed assets. A relatively low working capital investment of 6.2% is not unusual, particularly in the touroperating industry (Figure 5). Demands for holidays are often dictated by yearly trends,which gives rise to the ‘seasonality of cash-flow’ concept (Evans, Campbell, & Stonehouse,2002). Simply put, sales peak during summer and weeks immediately following Christmas,therefore routine injection of working capital to manage supply and demands are not alwaysa prerequisite. A tax rate of 27% appears reasonable since UK corporation tax rate tend to remain fairlystatic (Figure 7). According to the UK Budget Report, proposals are set for periodic cuts of1% per annum for the next 3 years (HM-Treasury, 2012). Small cuts over prolonged periodsare unlikely to exhibit any material impact on the firm’s underlying value. The WACC value of 12.8% was calculated through a number of key inputs (Figure 8). TheCapital Asset Pricing Model (CAPM) was employed to derive the cost of equity of 12.9%.Thomas Cook’s beta (1.53), a key component in the CAPM, was obtained from the FinancialTimes website as at 14th December 2012. Unlike other institutions, Financial Timescomputes a company’s beta using a 5-year historical adjusted betas’ measured againstmonthly observations of industry average. According to Graham and Dodsville, (2005) alonger timeframe is particularly useful for stable companies like Thomas Cook, based on thehypothesis that past performance will be a reliable indicator of future outcomes. Yet, theimpromptu resignation of the incumbent chairman-Manny Fontenla-Novoa, has exposedThomas Cook to unprecedented risk (Wearden, 2011). Significant shift in a firm’s risk profileis unlikely to be recognised promptly by way of a historically derived beta. Similar caution is
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