QUESTION 3 A sell-side analyst covering ABC plc is updating her valuation and price target of...

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QUESTION 3 A sell-side analyst covering ABC plc is updating her valuation and price target of ABC's stock for a research report that she is about to disseminate to clients. She decides to use the Discounted Free Cash Flow to the Firm (FCFF) valuation model, and collects the following information for the year just ended: Revenues: 1,650m Net profit margin: 18% Depreciation expense: 105m Net investment in property, plant & equipment: 120m Net interest expense: 37.5m The working capital has increased from 20m at the beginning of the year to 35m at the year-end Effective tax rate: 30% Current value of total liabilities net of cash: 1,500m Number of shares outstanding: 5m The company's target capital structure is 40% debt and 60% equity. Before-tax cost of debt: 7% Risk free rate: 4% The expected return of the market: 9% The stock's beta: 1.2 The historical-average EV/Sales (i.e., Enterprise Value-to-Sales) multiple of ABC plc's peer group is 3.2. ABC plc's current P/E (price-to-earnings) multiple is 16. The analyst forecasts that the company's FCFF and Sales will grow at 7% per annum over the next three years and decides to use this period as her forecast horizon. To estimate the terminal value of the enterprise at the forecast horizon, she decides to use the historical-average EV/Sales multiple of ABC's peer group (i.e., the method of comparables). She also assumes that next year the company will pay 120 in dividends per share. Required (please show your workings and include brief explanations) Estimate the one-year forward price target for ABC plc stock using the FCFF valuation approach. State and justify your investment recommendation. Suggest reasons or assumptions that you believe can underpin the analyst's decision to use the historical-average peer EV/Sales multiple for estimating the terminal value of ABC plc. Total for Question 3 (33 1/3 %) QUESTION 3 A sell-side analyst covering ABC plc is updating her valuation and price target of ABC's stock for a research report that she is about to disseminate to clients. She decides to use the Discounted Free Cash Flow to the Firm (FCFF) valuation model, and collects the following information for the year just ended: Revenues: 1,650m Net profit margin: 18% Depreciation expense: 105m Net investment in property, plant & equipment: 120m Net interest expense: 37.5m The working capital has increased from 20m at the beginning of the year to 35m at the year-end Effective tax rate: 30% Current value of total liabilities net of cash: 1,500m Number of shares outstanding: 5m The company's target capital structure is 40% debt and 60% equity. Before-tax cost of debt: 7% Risk free rate: 4% The expected return of the market: 9% The stock's beta: 1.2 The historical-average EV/Sales (i.e., Enterprise Value-to-Sales) multiple of ABC plc's peer group is 3.2. ABC plc's current P/E (price-to-earnings) multiple is 16. The analyst forecasts that the company's FCFF and Sales will grow at 7% per annum over the next three years and decides to use this period as her forecast horizon. To estimate the terminal value of the enterprise at the forecast horizon, she decides to use the historical-average EV/Sales multiple of ABC's peer group (i.e., the method of comparables). She also assumes that next year the company will pay 120 in dividends per share. Required (please show your workings and include brief explanations) Estimate the one-year forward price target for ABC plc stock using the FCFF valuation approach. State and justify your investment recommendation. Suggest reasons or assumptions that you believe can underpin the analyst's decision to use the historical-average peer EV/Sales multiple for estimating the terminal value of ABC plc. Total for Question 3 (33 1/3 %)