MG Capital Group needs your professional help to examine and provide a detailed valuation and analysis of
Question:
MG Capital Group needs your professional help to examine and provide a detailed valuation and analysis of Paradise Company (PC), a privately held real estate developer. The Company started in 2021 and has offered its common stock at $65 per share from the start. The risk-free rate is 2%, PC's beta is 1.8, and the market return is 10%. The growth rate after 2026 for dividend, net income, and cash flows are 3%.
Required Questions
1-Conduct industry analysis (life cycle, average growth rate, expected growth rate, main players, etc.) (10 points)
2-Conduct financial ratio analysis with the industry benchmarks for at least six profitability ratios (Must include ROA and ROCE (ROE)) and three risk ratios for 2022-2026. Discuss the ratios' calculations in relation to the company's performance individually and as a whole.
3-Create a statement of cash flows from 2022-2026 based on provided financial statements.
a. Discuss the validity of the statement of cash flows by examining the accounting quality of the provided financial statements.
4-Create two tables of free cash flows: 1. Free cash flows for all debt and equity stakeholders. 2.
Free cash flows for common equity shareholders.
5-Explain which free cash flows to use to examine PC for MG Capital Group. (Must decide on only one type of free cash flows to use.)
6-Calculate the intrinsic value per share price with dividend valuation method, Dividend Discount Model. (Must discuss and present all calculation steps in written format.
7-Calculate the intrinsic value per share price with cashflows from question 3's decision,
Discounted Cash Flows. (Must discuss and present all calculation steps in written format.
8-Calculate the intrinsic value per share price with the residual income method, Residual Income Model. Since PC launched in 2021, use 2021 equity book value to calculate 2021's residual income for the year 2021. (Must discuss and present all calculation steps in written format.
9-Discuss the different numerical results from questions 6-8 by examining the strengths and weaknesses of each calculation method.
10-Based on results from questions 1-9, present a recommendation to MG Capital Group to invest in PC or not. Be sure to include the logic of the recommendation in a detailed written format based on the numerical results from questions 1-9.
Auditing a risk based approach to conducting a quality audit
ISBN: 978-1133939153
9th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg