Table 1. Projected cash flows for TopMaverick Ltd (in m) 2016 2017 2018 2019 2020 EBIT(1-t)...

  

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Table 1. Projected cash flows for TopMaverick Ltd (in £m) 2016 2017 2018 2019 2020 EBIT(1-t) 80.50 86.14 92.16 98.62 Incremental Working 45.00 48.15 46.71 44.37 Capital Net Capital Expenditure 13.50 14.85 16.34 17.97 Net Cash Flow 18.95 23.14 29.12 36.28 61.67 *In the Net Cash Flow calculation, depreciation is added to EBIT(1-t). Here, we assume that it is already included in EBIT(1-t). Table 2. Projected data for peer companies (in £m) Goose Plc MerlinAir Plc Phoenix Plc Long-term debt 45 300 13 Total outstanding shares 20 25 35 Net book value of equity Beta levered 450 550 800 0.8 1.2 1.3 Stock Price Table 3. Stock price for peer companies (£) Goose Plc 46 MerlinAir Plc 55 Phoenix Plc 67 Required: c. Based on the information provided above: i. ii. Calculate the share price of TopMaverick Ltd using the Discounted Cash Flow (DCF) method and assuming that the terminal value of the company can be calculated as a growing perpetuity. Further, critically discuss the main limitations of the DCF approach. (40 marks) Now use the Comparable Firms approach, in particular the M/B multiple, to calculate the average share price and the share price range of TopMaverick Ltd. Briefly compare the DCF and the multiple approaches. (15 marks) c. Towards the end of 2018, after 3 years of public listing, analysts estimated TopMaverick Ltd's market-adjusted buy and hold return to be around -25%. Describe the stylized fact about IPOs known as "long-run underperformance". Discuss the theoretical explanations and empirical evidence provided in the literature for this observed anomaly. (15 marks) Table 1. Projected cash flows for TopMaverick Ltd (in £m) 2016 2017 2018 2019 2020 EBIT(1-t) 80.50 86.14 92.16 98.62 Incremental Working 45.00 48.15 46.71 44.37 Capital Net Capital Expenditure 13.50 14.85 16.34 17.97 Net Cash Flow 18.95 23.14 29.12 36.28 61.67 *In the Net Cash Flow calculation, depreciation is added to EBIT(1-t). Here, we assume that it is already included in EBIT(1-t). Table 2. Projected data for peer companies (in £m) Goose Plc MerlinAir Plc Phoenix Plc Long-term debt 45 300 13 Total outstanding shares 20 25 35 Net book value of equity Beta levered 450 550 800 0.8 1.2 1.3 Stock Price Table 3. Stock price for peer companies (£) Goose Plc 46 MerlinAir Plc 55 Phoenix Plc 67 Required: c. Based on the information provided above: i. ii. Calculate the share price of TopMaverick Ltd using the Discounted Cash Flow (DCF) method and assuming that the terminal value of the company can be calculated as a growing perpetuity. Further, critically discuss the main limitations of the DCF approach. (40 marks) Now use the Comparable Firms approach, in particular the M/B multiple, to calculate the average share price and the share price range of TopMaverick Ltd. Briefly compare the DCF and the multiple approaches. (15 marks) c. Towards the end of 2018, after 3 years of public listing, analysts estimated TopMaverick Ltd's market-adjusted buy and hold return to be around -25%. Describe the stylized fact about IPOs known as "long-run underperformance". Discuss the theoretical explanations and empirical evidence provided in the literature for this observed anomaly. (15 marks)

Answer rating: 100% (QA)

Solution c Calculation of share price using DCF method The DCF method involves calculating the present value of the companys future cash flows using a discount rate that reflects the risk associated w... View the full answer