PART A Equity Valuation

This individual assignment is designed to apply the techniques that you learn in class on the equity valuation of companies in today's stock markets.

Step 1: Pick the companies and intrinsic valuation

Using Yahoo Finance or NZX Research for company search. Pick two companies, making sure at least you have:

(Company 1, the main company that you analyse) One company which has growth potential. Look for companies whose earnings or revenues are growing in recent financial years.

(Company 2) The other company should be the competitor of Company 1, which means that Company 2 has the similar capitalisation and business line to Company 1 or is in competition with the business of Company 1 for market share.

Provide a narrative regarding the purpose of this report and introduce/brief necessary details of Company 1 you choose (e.g. how your company was evolving; describing the product/service markets, industries, and the competition it faces; discussing the past three-year financial performance evident in some key financial ratios). Also, you must: 1) justify the validity of your companies' comparison; 2) tie your narrative to key numbers and conclusion in your valuation. (20%)

Step 2: Discounted Cashflow Valuation

Value the stock in Company 1 using a Free Cash Flows to Equity model (you need to decide the specifications of FCFE model that best fit your companies, e.g., 2-stage, 3-stage, or n-stage...etc) and provide your responses to the requirements as follow.

a) Justify the specifications of the FCFE model for your companies (i.e. what pattern (2-stage, 3-stage, or n-stage) will you assume the Company's growth to follow and why?). (10%)

b) Conduct firm valuation using the FCFE Model for Company 1 (besides descriptions, please provide all your calculations/workings in tables and graphs as possible). See the Steps below.

(10%)

c) Identify at least two the assumptions used in your discounted cashflow valuation and describe their economic meanings. (5%)

d) Provide additional analyses and explain how the assumptions identified in (c) affect the results of your valuations. (20%)

e) Conduct Discounted Cashflow Valuation for Company 2 and compare the results in valuation for Company 1 with those for Company 2. (5%)

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Steps Using FCFE Valuation Model:

1. Estimate the discount rate r used in the equity valuation, that is, the cost of equity. Please follow the instructions of PART B to calculate it.

2. Estimate the current free cash flows to equity investors (FCFE) (see Week 3 Lecture slides)

To calculate FCFE, you may access annual reports (Form 10-K) of the companies from SEC EDGAR Search https://www.sec.gov/edgar/searchedgar/companysearch.html

3. Estimate the future earnings and cash flows on the firm being valued, generally by estimating an expected growth rate in earnings (?1) based on analysts' long-term growth forecasts (i.e. forecasted 5-year growth rate in EPS).

4. Estimate when the firm will reach "stable growth" and what characteristics (risk & cash flow) it will have when it does. In other words, determine the growth period(s), growth rate (?2 jQuery22403368362835373615_1609782027497 ?3 ???), and terminal value.

5. Use the DCF model you choose to estimate PV of future FCFEs.

6. Compare the value relative to the market capitalisation (= stock price x number of outstanding shares) to estimate whether the equity value of the company is currently overvalued or undervalued.

Calculating Free Cash flow to Equity (FCFE):

For the firm's leverage is stable (i.e. the net capital expenditure assumption),

Free Cash flow to Equity = Net Income - (1- DR) (Capital Expenditures - Depreciation) - (1- DR) Working Capital Needs; where DR = Debt/Capital Ratio

Step 3: Value relative to the comparable

a) Compute current PE Ratios for Company 1 and Company 2.

b) Consider value comparison using the PE Ratios of Companies 1 and 2.

(5%)

Step 4: Final Value Estimate and Recommendation

Consider the results you have obtained from the discounted cash flow and the comparable.

a) Provide the economic implications of your comparisons from Step 2 and Step 3. How would you reconcile the inconsistent results (if existed)? (5%)

b) Make final recommendations on the stocks in your group (Strong Buy, Buy, Hold, Sell, or Strong Sell), justify your recommendations, and summarise all your analyses and the results with a conclusion. (10%)

Part B

2) Suppose you are the manager of a California Winery. How would you expect the following events to affect the price you receive for a bottle of wine?

a. The price of comparable French wines decreases.

b. One hundred new wineries open in California.

c. The unemployment rate in the United States decrease.

d. The price of cheese increases.

e. The price of a glass bottle increases significantly due to new government antishatter regulations.

f. Researchers discover a new wine-making technology that reduces production costs.

g. The price of wine vinegar, which is made from the leftover grape mash, increases.

h. The average age of consumers increases, and older people drink less wine.

3) A patient's total surgery charges are $1,278. The patient must pay the annual deductible of $1,000, and the policy states a 80-20 coinsurance. What does the patient owe?

4) These balances and totals are from Bantu Ltd for the year ended 30 June 2020. Real accounts section 30-Jun-19 30-Jun-20 Inland Revenue: Income Tax 12,000.00 15,000.00 Shareholders for dividends 15,000.00 20,000.00 Nominal accounts section 30-Jun-20 Income tax expense 38,000.00 Under-provision for taxation in the previous year 3,200.00 Dividends Interim 18,000.00 Final 20,000.00 You are required to: 1. Calculate the amount of dividends and taxation paid. (12 marks)

5) Harrington Company is giving each of its employees a holiday bonus of $250 on December 13, 20-- (a nonpayday). The company wants each employee's check to be $250. The supplemental tax percent is used.

a.What will be the gross amount of each bonus if each employee pays a state income tax of 3.01% (besides the other payroll taxes)

6) it is known that $784 invested in compound interest for 2 years will earn $240 interest. Find the accumulated value of $68841472 invested at the same rate of compound interest for 5 years.

7) Waterway Industries has 515000 shares of $10 par value common stock outstanding. During the year Waterway declared a 14% stock dividend when the market price of the stock was $37 per share. Three months later Waterway declared a $0.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by?

8)