I ONLY need help with the theory part (Assumptions made in arriving to my solutions) to Question 4(a) & (b). I need a detailed explanation to all the assumptions made to the solutions. Thanks!

Calculation Part to Question 4(a) & (b):

Question 4 Consider the following information for Amalphi PLC: 31.12.2015 Statement of financial position as at 31.12.2016 Current operating assets Im 120 I'm 123 750 Property, plant and equipment 762 Current operating liabilities 360 375 240 Non-current financial liabilities 225 270 285 Common shareholders equity 31.12.2015 31.12.2016 Income statement for the period ended Revenues fm 900 Em 930 Gross margin 270 255 Depreciation 60 66 Tax on operating income 60 84 Operating income after tax 150 105 Net financing expenses 30 24 Comprehensive earnings 120 81 Assume that the weighted average cost of capital is 8%, cost of capital for equity is 11%, and growth rate (g) is 1%. (a) In the context of simple forecasting, forecast Amalphi PLC's Abnormal Operating Income and Abnormal Earnings for year 2017 under the following methods: Forecasting from Book Values (SF1 Forecasting), Forecasting from Earnings and Book Values (SF2 Forecasting) and Forecasting from Accounting Rates of Return (SF3 Forecasting). Comment briefly on the assumptions you make in arriving at your solutions. (10 marks) 11 Valuation and securities analysis (b) In the context of simple forecasting, estimate the intrinsic value of Net Operating Assets and Common Shareholders' Equity at 31.12.2016 under the following methods: Forecasting from Book Values (SF1 Forecasting), Forecasting from Earnings and Book Values (SF2 Forecasting) and Forecasting from Accounting Rates of Return (SF3 Forecasting). Comment briefly on the assumptions you make in arriving at your solutions. (10 marks) (a) We have: SF1 Abnormal Operating Income (AOI) (2017) = Abnormal Earnings (AE) (2017) - 0 0 SE2 AOI (2017) = OI(2016) -rpXNOA(2015) 105 0.08 x (120 + 750 - 360) 64.2 AE (2017) = CE(2016) - eXCSE(2015) = 81 -0.11 x 270 51.3 SF3 RNOA(2016) = OI(2016)/NOA (2015) = 105/(120 + 750 360) 0.205882 AOI (2017) [RNOA (2016) rpX NOA (2016) = (0.205882 0.08) x (123+ 762 375) 64.2 ROCE(2016) = CE(2016) / CSE(2015) 81/270 0.3 AE (2017) (ROCE(2016) re]x CSE(2016) = (0.3-0.11) x 285 54.2 (b) We have: SFI VF (2016) NOA(2016) VE (2016) = CSE(2016) 510 285 SF2 VF(2016) = NOA(2016) + AQI(2016)/re = 510 + (105 0.08 x (120 + 750 360))/0.08 11.312.5 VE(2016) = CSE(2016) + AE(2016)/re = 285+ (81 -0.11 x 270)/0.11 751.4 SF3 VF(2016) = NOA(2016)x (RNOA (2016) 9/(rp - g)] = 510 x [(0, 205882 0.01)/(0.08 0.01)] 1.427.1 VE(2016) = CSE(2016)[(ROCE(2016) 9)/(1E 9)] = 285 x (0.3 0.01)/(0.11 -0.01) 826.5 Question 4 Consider the following information for Amalphi PLC: 31.12.2015 Statement of financial position as at 31.12.2016 Current operating assets Im 120 I'm 123 750 Property, plant and equipment 762 Current operating liabilities 360 375 240 Non-current financial liabilities 225 270 285 Common shareholders equity 31.12.2015 31.12.2016 Income statement for the period ended Revenues fm 900 Em 930 Gross margin 270 255 Depreciation 60 66 Tax on operating income 60 84 Operating income after tax 150 105 Net financing expenses 30 24 Comprehensive earnings 120 81 Assume that the weighted average cost of capital is 8%, cost of capital for equity is 11%, and growth rate (g) is 1%. (a) In the context of simple forecasting, forecast Amalphi PLC's Abnormal Operating Income and Abnormal Earnings for year 2017 under the following methods: Forecasting from Book Values (SF1 Forecasting), Forecasting from Earnings and Book Values (SF2 Forecasting) and Forecasting from Accounting Rates of Return (SF3 Forecasting). Comment briefly on the assumptions you make in arriving at your solutions. (10 marks) 11 Valuation and securities analysis (b) In the context of simple forecasting, estimate the intrinsic value of Net Operating Assets and Common Shareholders' Equity at 31.12.2016 under the following methods: Forecasting from Book Values (SF1 Forecasting), Forecasting from Earnings and Book Values (SF2 Forecasting) and Forecasting from Accounting Rates of Return (SF3 Forecasting). Comment briefly on the assumptions you make in arriving at your solutions. (10 marks) (a) We have: SF1 Abnormal Operating Income (AOI) (2017) = Abnormal Earnings (AE) (2017) - 0 0 SE2 AOI (2017) = OI(2016) -rpXNOA(2015) 105 0.08 x (120 + 750 - 360) 64.2 AE (2017) = CE(2016) - eXCSE(2015) = 81 -0.11 x 270 51.3 SF3 RNOA(2016) = OI(2016)/NOA (2015) = 105/(120 + 750 360) 0.205882 AOI (2017) [RNOA (2016) rpX NOA (2016) = (0.205882 0.08) x (123+ 762 375) 64.2 ROCE(2016) = CE(2016) / CSE(2015) 81/270 0.3 AE (2017) (ROCE(2016) re]x CSE(2016) = (0.3-0.11) x 285 54.2 (b) We have: SFI VF (2016) NOA(2016) VE (2016) = CSE(2016) 510 285 SF2 VF(2016) = NOA(2016) + AQI(2016)/re = 510 + (105 0.08 x (120 + 750 360))/0.08 11.312.5 VE(2016) = CSE(2016) + AE(2016)/re = 285+ (81 -0.11 x 270)/0.11 751.4 SF3 VF(2016) = NOA(2016)x (RNOA (2016) 9/(rp - g)] = 510 x [(0, 205882 0.01)/(0.08 0.01)] 1.427.1 VE(2016) = CSE(2016)[(ROCE(2016) 9)/(1E 9)] = 285 x (0.3 0.01)/(0.11 -0.01) 826.5