Develop your narrative: You need to provide a brief background of the company detailing what the company
Question:
Develop your narrative: You need to provide a brief background of the company detailing what the company does, and briefly discussing its financial position. You should also discuss the firm's industry, including the future prospects of the industry, how much competition there is, how easily new competitors could enter the market, and any significant future threats to the industry (i.e., climate change, government regulations, etc.).
Use the information above to estimate an appropriate growth rate for the firm and any other numbers that you will need to use in your valuation model. Specifically, describe and evaluate on the growth rate you have identified and discuss whether this growth rate looks realistic.
This is what I come up with, see table below: Those number in the table are exported from CONTACT ENERGY LIMITEDannual report found in NZX company research and Refinitiv database
Year | 2018 | 2019 | 2020 | 2021 | 2022 | ||
Earnings and FCF Forecast ($mexcept for sales) | |||||||
1 | Sales ($billion) | 2152.00 | 2460.00 | 2073.00 | 2573.00 | 2387.00 | |
2 | Growth versus Prior Year | 14.3% | -15.7% | 24.1% | -7.2% | ||
3 | Cost of Goods Sold | 1955.00 | 1622.00 | 2020.00 | 1856.80 | ||
4 | Gross Profit | 505.0 | 451.0 | 553.0 | 530.2 | ||
5 | Depreciation and Amortization | 205.0 | 220.0 | 249.0 | 262.0 | ||
6 | Interest Expense | (69.0) | (50.0) | (46.0) | (31.0) | ||
7 | EBIT | 231.0 | 181.0 | 258.0 | 237.2 | ||
8 | Less: Tax Paid | (69.0) | (46.0) | (74.0) | (71.0) | ||
9 | Plus: Depreciation Expense | 169.0 | 184.0 | 208.0 | 215.0 | ||
10 | Less: Capital Expenditures | 60.0 | 51.0 | 61.0 | 75.0 | ||
11 | Less: Increase in NWC | -163.00 | 154.00 | 330.00 | -414.00 | ||
12 | Free Cash Flow | 434.0 | 114.0 | 1.0 | 720.2 |
Value the stock of your assigned company using the Discounted Cash Flow (DCF) or Dividend Discount model and evaluate the results by providing necessary justification.
Critically evaluate how sensitive your value estimates are to changes in your growth assumption.
Calculate the company's stock price using the average P/E ratio of the industry your firm operates in. Hint: For information about the industry, login to Refinitiv database click on 'Peers & Valuation' and then 'Sector Competitor.'
Compare the estimates you get from the discounted cash flow model and the P/E ratio method. Explain why the estimates from the two valuation methods differ. Specifically address the assumptions implicit in the models themselves, as well as the assumptions you made in preparing your analysis.
Compare the share prices produced by the two methods to the actual (current market) share price. What recommendations can you make as to whether investors should buy or sell the company's shares based on your estimates? Why do these estimates differ from the actual share price of the company?
Auditing Cases An Interactive Learning Approach
ISBN: 978-0132423502
4th Edition
Authors: Steven M Glover, Douglas F Prawitt